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 Required: Compute divisional income for the two divisions. Calculate the operating margin, which is equivalent to the return on sales, for the two divisions. Calculate ROI for the two divisions. Compute residual income for the two divisions.
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 Required: Compute divisional income for the two divisions. Calculate the operating margin, which is equivalent to the return on sales, for the two divisions. Calculate ROI for the two divisions. Compute residual income for the two divisions.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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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
| Division | ||
|---|---|---|
| Canal ($000) | Lake ($000) | |
| Allocated corporate |
$ 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 |
Required:
-
Compute divisional income for the two divisions.
-
Calculate the operating margin, which is equivalent to the return on sales, for the two divisions.
-
Calculate ROI for the two divisions.
-
Compute residual income for the two divisions.
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