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

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