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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 9 percent cost of capital and uses beginning-of-the-year investment when computing ROI and residual income. Ignore income taxes. so Division $ 1,500 AC Division Allocated corp. overhead Cost of goods sold Divisional investment 630 3,260 7,600 9,600 77,000 4,200 20,600 1,230 R&D 1,875 Sales 9,200 SG&A 790 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. Al, the manager of the AC Division, complains that the calculation of EVA is unfair, because a much longer life is assumed for the SO Division in calculating EVA. Sean, the manager of SO, responds that EVA is supposed to reflect economic reality and that the reality is that R&D investments in SO Division do have a longer life. Required: a. Assume that the economic life of R&D investments is two years in the AC Division. What economic life would the R&D investments in the SO Division have to make EVA in the two divisions equal? (Round EVA to 2 decimal places and final answer to 1 decimal places. Do not round intermediate calculations.)

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 9 percent cost of capital and uses beginning-of-the-year investment when computing ROI and residual income. Ignore income taxes. so Division $ 1,500 AC Division Allocated corp. overhead Cost of goods sold Divisional investment 630 3,260 7,600 9,600 77,000 4,200 20,600 1,230 R&D 1,875 Sales 9,200 SG&A 790 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. Al, the manager of the AC Division, complains that the calculation of EVA is unfair, because a much longer life is assumed for the SO Division in calculating EVA. Sean, the manager of SO, responds that EVA is supposed to reflect economic reality and that the reality is that R&D investments in SO Division do have a longer life. Required: a. Assume that the economic life of R&D investments is two years in the AC Division. What economic life would the R&D investments in the SO Division have to make EVA in the two divisions equal? (Round EVA to 2 decimal places and final answer to 1 decimal places. Do not round intermediate calculations.)

Cornerstones of Cost Management (Cornerstones Series)
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter10: Decentralization: Responsibility Accounting, Performance Evaluation, And Transfer Pricing
Section: Chapter Questions
Problem 1CE: Forchen, Inc., provided the following information for two of its divisions for last year: Required:...
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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 9 percent cost of capital and uses beginning-of-the-year investment when computing ROI and residual income. Ignore income taxes. so Division $ 1,500 AC Division $ 630 Allocated corp. overhead Cost of goods sold 3,260 7,600 77,000 Divisional investment 9,600 R&D 4,200 1,875 9,200 Sales 20,600 SG&A 790 1,230 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. Al, the manager of the AC Division, complains that the calculation of EVA is unfair, because a much longer life is assumed for the SO Division in calculating EVA. Sean, the manager of SO, responds that EVA is supposed to reflect economic reality and that the reality is that R&D investments in SO Division do have a longer life. Required: a. Assume that the economic life of R&D investments is two years in the AC Division. What economic life would the R&D investments in the SO Division have to make EVA in the two divisions equal? (Round EVA to 2 decimal places and final answer to 1 decimal places. Do not round intermediate calculations.) Economic life years
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 9 percent cost of capital and uses beginning-of-the-year investment when computing ROI and residual income. Ignore income taxes. so Division $ 1,500 AC Division $ 630 Allocated corp. overhead Cost of goods sold 3,260 7,600 77,000 Divisional investment 9,600 R&D 4,200 1,875 9,200 Sales 20,600 SG&A 790 1,230 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. Al, the manager of the AC Division, complains that the calculation of EVA is unfair, because a much longer life is assumed for the SO Division in calculating EVA. Sean, the manager of SO, responds that EVA is supposed to reflect economic reality and that the reality is that R&D investments in SO Division do have a longer life. Required: a. Assume that the economic life of R&D investments is two years in the AC Division. What economic life would the R&D investments in the SO Division have to make EVA in the two divisions equal? (Round EVA to 2 decimal places and final answer to 1 decimal places. Do not round intermediate calculations.) Economic life years
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