Lasky Manufacturing has two divisions: Carolinas and Northeast. Lasky has a cost of capital of 7.5 percent.
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Question:
Lasky Manufacturing has two divisions: Carolinas and Northeast. Lasky has a cost of capital of 7.5 percent. Selected financial information (in thousands of dollars) for the first year of business follows:
| Carolinas | Northeast | |
|---|---|---|
| Sales revenue | $ 2,000 | $ 6,400 |
| Income | 160 | 312 |
| Divisional assets (beginning of year) | 1,000 | 1,500 |
| Current liabilities (beginning of year) | 280 | 280 |
| R&D expendituresa | 1,000 | 920 |
aR&D is assumed to benefit two periods. All R&D is spent at the beginning of the year.
Required:
a-1. Evaluate the performance of the two divisions assuming Lasky Manufacturing uses residual income.
a-2. Which division had the better performance?
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