Problem
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 as follows. 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.
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AC Division
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SO Division
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Allocated Corp. Overhead
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$600
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$1,800
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Cost of Goods Sold
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$3,200
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$7,000
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Divisional Investment
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$9,000
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$80,000
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R&D
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$2,000
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$3,600
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Sales
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$8,000
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$20,000
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SG&A
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$700
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$1,530
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Task
Compute Residual income for the two divisions.