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 an 8 percent cost of capital and uses beginning-of-the-year investment when computing ROI and residual income. Ignore income taxes.| | AC Division | SO Division ||-------------------|-------------|-------------|| Allocated corp. overhead | $675 | $1,050 || Cost of goods sold | 3,350 | 5,500 || Divisional investment | 10,500 | 72,500 || R&D | 2,750 | 3,600 || Sales | 11,000 | 19,500 || SG&A | 925 | 780 |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 ||------------------|-------------|-------------|| Economic value added | | |

AC division: Adjusted capital=Divisional investement+R&D×50%=$10,500+$2,750×50%=$11,875Net profit=Sale-COGS+Allocated corp. overhead+R&D+SG&A=$11,000-$3,350+$675+$2,750+$925=$3,300 Adjusted profit=Net profit+R&D×50%=$3,300+$2,750×50%=$4,675 EVA (AC division)=Adjusted profit-Cost of capital×Adjusted investment=$4,675-8%×$11,875=$5,625 50% has been considered as the life of AC division is 2 years.SO division: Adjusted capital=Divisional investement+R&D×89=$72,500+$3,600×89=$75,700 Net profit=Sale-COGS+Allocated corp. overhead+R&D+SG&A=$19,500-$5,500+$1,050+$3,600+$780=$8,570 Adjusted profit=Net profit+R&D×89=$8,570+$3,600×89=$11,770 EVA (SO division)=Adjusted profit-Cost of capital×Adjusted investment=$11,770-8%×$75,700=$5,714 8/9 has been taken because the life of division SO is of 9 years.

Business

Accounting

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. TT so Division $ 1,050 AC Division Allocated corp. overhead 675 Cost of goods sold 3,350 10,500 5,500 Divisional investment 72,500 R&D 2,750 3,600 Sales 11,000 19,500 SG&A 925 780 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 Economic value added

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. TT so Division $ 1,050 AC Division Allocated corp. overhead 675 Cost of goods sold 3,350 10,500 5,500 Divisional investment 72,500 R&D 2,750 3,600 Sales 11,000 19,500 SG&A 925 780 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 Economic value added

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Similar questions

The following information is available about the status and operations of the Manufacturing Division of Taylor Company, which has a hurdle rate of 6%. Divisional identifiable average assets $ 411,637 Divisional income from operations $ 18,924 Divisional sales revenue $ 368,363 1. Compute the ROI for the Manufacturing Division. 2. Break the Manufacturing Division ROI down using the Profit Margin and Investment turnover (DuPont) formula. 3. Compute the residual income for the Manufacturing Division.
Navarre Energy Research specializes in developing and commercializing new products. It is organized into two divisions, which are based on the products they produce. Canal Division is smaller, and the lives of the products it produces tend to be shorter than those produced by the larger Lake Division. Selected financial data for the past year are shown in the following table. Divisional investment is as of the beginning of the year. Navarre uses an 8 percent cost of capital and beginning-of-the-year investment when computing ROI and residual income. Ignore income taxes. Allocated corporate overhead Cost of goods sold Divisional investment RAD Sales Selling, general and administrative (excluding R&D) Division Canal (5000) $4,120 20,040 60,500 12,200 50,800 4,560 Lake (5000) $9,400 29,600 398,000 31,800 190,000 7,500 R&D is assumed to have a three-year life in Canal Division and an eight-year life in Lake Division. All R&D expenditures are spent at the beginning of the year. Assume there…
Houghton Chemicals, which started operations one year ago, has two divisions: Alloys and Petro. Both divisions invest heavily in R&D, which is assumed to generate benefits for five years. R&D spending is made uniformly throughout the year. Houghton Chemicals has a cost of capital of 11 percent. Selected financial information for the two divisions (in thousands of dollars) for the year just completed follows: Sales revenue Divisional income Divisional investment Current liabilities R&D Alloys $ 7,400 777 5,550 160 200 Residual Income of Alloys division Residual Income of Petro division Which division performed better? Petro $ 5,500 945 7,000 200 300 Required: Evaluate the performance of the two divisions assuming Houghton Chemicals uses residual income. Note: Enter your answers in thousands of dollars rounded to 1 decimal place. X Answer is not complete. The Petro division performed better
What was the division’s ROI for the year?
6. Compute the residual income of CBS.7. Compute the EVA of CBS
1. Compute the residual income of MCC. 2. Compute the EVA of MCC.
Navarre Energy Research specializes in developing and commercializing new products. It is organized into two divisions, which are based on the products they produce. Canal Division is smaller, and the lives of the products it produces tend to be shorter than those produced by the larger Lake Division. Selected financial data for the past year are shown in the following table. Divisional investment is as of the beginning of the year. Navarre uses an 8 percent cost of capital and beginning-of-the-year investment when computing ROI and residual income. Ignore income taxes. Division Canal ($000) Lake ($000) Allocated corporate overhead $ 4,100 $ 9,600 Cost of goods sold 20,000 30,000 Divisional investment 60,100 400,000 R&D 12,000 32,000 Sales 50,000 100,000 Selling, general and administrative (excluding R&D) 4,500 8,000 R&D is assumed to have a three-year life in Canal Division and an eight-year life in Lake Division. All R&D expenditures are spent…
The South Division of Wiig Company reported the following data for the current year. Sales Variable costs Controllable fixed costs Average operating assets 1. 2. 3. Top management is unhappy with the investment center's return on investment (ROI). It asks the manager of the South Division to submit plans to improve ROI in the next year. The manager believes it is feasible to consider the following independent courses of action. Return on Investment $2,950,000 1,947,000 Increase sales by $300,000 with no change in the contribution margin percentage. Reduce variable costs by $155,000. Reduce average operating assets by 4%. Action 1 595,000 (a) Compute the return on investment (ROI) for the current year. (Round ROI to 2 decimal places, e.g. 1.57%.) Action 2 5,000,000 Action 3 (b) Using the ROI formula, compute the ROI under each of the proposed courses of action. (Round ROI to 2 decimal places, e.g. 1.57%.) Return on investment do % % % %
Return on Investment (ROI) The following information relates to the operating performance of two divisions of Campbell Food International Company's: 1) Soup and Sauces and 2) Beverages. (all figures are in millions except for WACC) Sales Division 1 Division 2 $2,000 $300 Net Income $240 $60 The tax rate is 25%. REQUIRED: (a) Compute each division's after-tax margin. Average Operating Assets $1,500 $375 (b) Compute each division's after-tax return on investment (ROI). Average Current Liabilities $400 $150 Weighted Average Cost of Capital 16% 16% (c) Comments on the results of the preceding calculations and what would you recommend for the company to do to improve return on investment (ROI).
Kelfour Enterprises has divided its operations into two divisions. Relevant accounting data for each division is as follows: Divisions Sales Operating Assets Operating Income Western Division $ 330,000 $ 280,000 $ 33,000 Eastern Division $ 480,000 $ 330,000 $ 34,500 Kelfour has an additional $68,000 of funds to invest. The manager of the Western Division believes that she can invest the funds at a rate of return (ROI) of 23.00% while the manager of the Eastern Division has found a new investment opportunity that is expected to yield a 21.00% ROI. Kelfour uses residual income (RI) to evaluate managerial performance. The company wide desired ROI is 19.00%. Based on this information Multiple Choice The manager of the Western Division would accept the $68,000 additional investment opportunity because it would increase the Division's RI by $2,720. The manager of the Eastern Division would accept the $68,000 additional investment…
Long Beach Pharmaceutical Company has two divisions, which reported the following results for the most recent year. Income Average invested capital ROI Division I $ 900,000 $6,000,000 Division II $ 200,000 $1,000,000 15% 20% Which was the more successful division during the year? Think carefully about this, and Required: explain your answer.
Oscar Clemente is the manager of Forbes Division of Pitt, Inc., a manufacturer of biotech products. Forbes Division, which has $4.18 million in assets, manufactures a special testing device. At the beginning of the current year, Forbes invested $5.05 million in automated equipment for test machine assembly. The division 's expected income statement at the beginning of the year was as follows. Sales revenue $ 16,080,000 Operating costs Variable 2,040, 000 Fixed (all cash) 7,600,000 Depreciation New equipment 1,610,000 Other 1,350,000 Division operating profit $ 3,480,000A sales representative from LSI Machine Company approached Oscar in October. LSI has for $5.85 million a new assembly machine that offers significant improvements over the equipment Oscar bought at the beginning of the year. The new equipment would expand division output by 10 percent while reducing cash fixed costs by 5 percent. It would be depreciated for accounting purposes over a three-year life. Depreciation would…