Required: a. Compute residual income for the three regions. Ignore taxes. b. How have these regions performed?
Required: a. Compute residual income for the three regions. Ignore taxes. b. How have these regions performed?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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![### Lauderdale Corporation Case Study
Lauderdale Corporation operates in three geographical divisions with managers responsible for revenues, costs, and assets within their regions. The firm is decentralized, and managers are evaluated based on divisional performance. Corporate overhead is allocated based on regional gross margin.
#### Financial Data from the First Year of Operations:
| | Region I | Region II | Region III | Total Corporation |
|-------------------|----------|-----------|------------|-------------------|
| **Revenues** | $1,200,000 | $1,650,000 | $2,250,000 | $5,100,000 |
| **Cost of Sales** | $450,000 | $810,000 | $1,140,000 | $2,400,000 |
| **Selling, General, and Administrative (all fixed)** | $420,000 | $630,000 | $850,000 | $1,900,000 |
| **Corporate Overhead** | - | - | - | $432,000 |
#### Division Assets:
- **Region I**: $700,000
- **Region II**: $630,000
- **Region III**: $1,287,500
Cost of Capital: **8.6%**
#### Required Tasks:
a. **Compute Residual Income** for the three regions, ignoring taxes.
b. **Evaluate Regional Performance**.
### Solution Steps
**Residual Income Calculation**
Residual Income is calculated using the formula:
\[ \text{Residual Income} = \text{Operating Income} - (\text{Cost of Capital} \times \text{Division Assets}) \]
- **Operating Income** = Revenues - Cost of Sales - Selling, General, and Administrative Expenses
Please compute the residual income accurately and round to the nearest whole dollar.
**Regional Performance**
Analyse the residual income to assess how each region's performance compares to its capital costs, providing insights into managerial effectiveness and division profitability.
Continue by entering your answers in the provided tabs for further analysis.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F88957f30-db5b-4568-af5b-481f5c2f675d%2F85febe42-a493-4512-a07d-7b27f0b96db0%2Fma54kze_processed.png&w=3840&q=75)
Transcribed Image Text:### Lauderdale Corporation Case Study
Lauderdale Corporation operates in three geographical divisions with managers responsible for revenues, costs, and assets within their regions. The firm is decentralized, and managers are evaluated based on divisional performance. Corporate overhead is allocated based on regional gross margin.
#### Financial Data from the First Year of Operations:
| | Region I | Region II | Region III | Total Corporation |
|-------------------|----------|-----------|------------|-------------------|
| **Revenues** | $1,200,000 | $1,650,000 | $2,250,000 | $5,100,000 |
| **Cost of Sales** | $450,000 | $810,000 | $1,140,000 | $2,400,000 |
| **Selling, General, and Administrative (all fixed)** | $420,000 | $630,000 | $850,000 | $1,900,000 |
| **Corporate Overhead** | - | - | - | $432,000 |
#### Division Assets:
- **Region I**: $700,000
- **Region II**: $630,000
- **Region III**: $1,287,500
Cost of Capital: **8.6%**
#### Required Tasks:
a. **Compute Residual Income** for the three regions, ignoring taxes.
b. **Evaluate Regional Performance**.
### Solution Steps
**Residual Income Calculation**
Residual Income is calculated using the formula:
\[ \text{Residual Income} = \text{Operating Income} - (\text{Cost of Capital} \times \text{Division Assets}) \]
- **Operating Income** = Revenues - Cost of Sales - Selling, General, and Administrative Expenses
Please compute the residual income accurately and round to the nearest whole dollar.
**Regional Performance**
Analyse the residual income to assess how each region's performance compares to its capital costs, providing insights into managerial effectiveness and division profitability.
Continue by entering your answers in the provided tabs for further analysis.
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