Chapter 14, Problem 43P

Comparing Business Units Using Divisional Income, ROI, and Residual Income

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 below. 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.

Required

1. a.      Compute divisional income for the two divisions.
2. b.      Calculate the operating margin, which is equivalent to the return on sales, for the two divisions.
3. c.       Calculate ROI for the two divisions.
4. d.      Compute residual income for the two divisions.
5. e.       Assess the financial performance of the two divisions based on your analysis.