Colonial Pharmaceuticals is a small firm specializing in new products. It is organized into two divisions. which are based on the products they produce. AC Division is smaller and the life of the products it produces tend to be shorter than those produced by the larger SO Division. Selected financial data for the past year is shown as follows. Divisional investment is as of the beginning of the year. Colonial Pharmaceuticals uses a 8 percent cost of capital and uses beginning-of-the-year investment when computing ROI and residual income. Ignore income taxes. Allocated corp. overhead Cost of goods sold Divisional investment R&D Sales SG&A AC Division 50 Division $ 1,700 $ 610 3,220 6,800 9,200 79,000 2,100 3,150 8,400 19,000 730 1,430 R&D is assumed to have a two-year life in the AC Division and a nine-year life in the SO division. All R&D expenditures are spent at the beginning of the year. Assume there are no current liabilities and (unrealistically) that no R&D investments had taken place before this year. Required: a. Compute EVA for the two divisions. (Do not round intermediate calculations.) Economic value added AC Division SO Division $ 1,970
Colonial Pharmaceuticals is a small firm specializing in new products. It is organized into two divisions. which are based on the products they produce. AC Division is smaller and the life of the products it produces tend to be shorter than those produced by the larger SO Division. Selected financial data for the past year is shown as follows. Divisional investment is as of the beginning of the year. Colonial Pharmaceuticals uses a 8 percent cost of capital and uses beginning-of-the-year investment when computing ROI and residual income. Ignore income taxes. Allocated corp. overhead Cost of goods sold Divisional investment R&D Sales SG&A AC Division 50 Division $ 1,700 $ 610 3,220 6,800 9,200 79,000 2,100 3,150 8,400 19,000 730 1,430 R&D is assumed to have a two-year life in the AC Division and a nine-year life in the SO division. All R&D expenditures are spent at the beginning of the year. Assume there are no current liabilities and (unrealistically) that no R&D investments had taken place before this year. Required: a. Compute EVA for the two divisions. (Do not round intermediate calculations.) Economic value added AC Division SO Division $ 1,970
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Transcribed Image Text:Colonial Pharmaceuticals is a small firm specializing in new products. It is organized into two divisions,
which are based on the products they produce. AC Division is smaller and the life of the products it
produces tend to be shorter than those produced by the larger SO Division. Selected financial data for
the past year is shown as follows. Divisional investment is as of the beginning of the year. Colonial
Pharmaceuticals uses a 8 percent cost of capital and uses beginning-of-the-year investment when
computing ROI and residual income. Ignore income taxes.
Allocated corp. overhead
Cost of goods sold
Divisional investment
R&D
Sales
SG&A
AC Division
$ 610
3,220
9,200
2,100
8,400
736
Economic value added
50 Division
$ 1,700
6,800
79,000
3,150
19,000
1,430
R&D is assumed to have a two-year life in the AC Division and a nine-year life in the SO division. All
R&D expenditures are spent at the beginning of the year. Assume there are no current liabilities and
(unrealistically) that no R&D investments had taken place before this year.
Required:
a. Compute EVA for the two divisions. (Do not round intermediate calculations.)
AC Division SO Division
$
1,970
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