Fundamentals Of Cost Accounting (6th Edition)
6th Edition
ISBN: 9781259969478
Author: WILLIAM LANEN, Shannon Anderson, Michael Maher
Publisher: McGraw Hill Education
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Textbook Question
Chapter 14, Problem 43P
Comparing Business Units Using Divisional 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
- a. Compute divisional income for the two divisions.
- b. Calculate the operating margin, which is equivalent to the return on sales, for the two divisions.
- c. Calculate ROI for the two divisions.
- d. Compute residual income for the two divisions.
- e. Assess the financial performance of the two divisions based on your analysis.
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Problem 14-44 (Algo) Comparing Business Units Using Economic Value Added (EVA) (LO 14-4)
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.
AC Division
sO Division
Allocated corp. overhead
Cost of goods sold
2$
695
850
3,390
5,100
70,500
3,600
17,500
Divisional investment
10,900
2,950
11,800
R&D
Sales
SG&A
985
580
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…
Exercise 25.4 (Algo) ROI versus EVA Measures (LO25-2, LO25-3, LO25-4)
Bailey uses ROI to measure the performance of its operating divisions and to reward its division managers. A summary of the annual
eports from two of Bailey's divisions is shown provided below. The company's weighted-average cost of capital is 11 percent.
Division A
Division B
$6,220,000
$4
650,000
$ 1,060,000
$ 8,530,000
$ 1,850,000
$ 1,182,100
Total assets
Current liabilities
After-tax operating income
ROI
21%
13%
a. Based on ROI, Division A generates more profit per dollar of invested capital than Division B. Compute the EVA for Division A and
Division B.
c. Suppose the manager of Division A was offered a one-year project that would increase her investment base by $340,000 and
increase her divisional operating income by $34,000. Would she be motivated to invest in this project?
Comple
this question by entering your answers in the tabs below.
Required A
Required B
Based on ROI, Division A generates more profit per…
Hardin Company is a division of a major corporation. The following data are for the latest year ofoperations:Sales $ 19,600,000 Net operating income $ 470,400 Average operating assets $ 5,000,000 The company's minimum required rate of return 10 %
Required:a. What is the division's margin?b. What is the division's turnover?c. What is the division's return on investment (ROI)?d. What is the division's residual income?
Chapter 14 Solutions
Fundamentals Of Cost Accounting (6th Edition)
Ch. 14 - What are the advantages of divisional income as a...Ch. 14 - How is divisional income like income computed for...Ch. 14 - How is return on investment (ROI) computed?Ch. 14 - What are the advantages of using an ROI-type...Ch. 14 - How can ratios, such as ROI, be used for control...Ch. 14 - How does residual income differ from ROI?Ch. 14 - How does EVA differ from residual income?Ch. 14 - What impact does the use of gross book value or...Ch. 14 - What are the dangers of using only business unit...Ch. 14 - A company prepares the master budget by taking...
Ch. 14 - Prob. 11CADQCh. 14 - What problems might there be if the same methods...Ch. 14 - Prob. 13CADQCh. 14 - The chapter identified some problems with ROI-type...Ch. 14 - Failure to invest in projects is not a problem...Ch. 14 - How would you respond to the following comment?...Ch. 14 - Prob. 17CADQCh. 14 - Prob. 18CADQCh. 14 - Prob. 19CADQCh. 14 - Prob. 20CADQCh. 14 - Prob. 21CADQCh. 14 - Compute Divisional Income Arlington Clothing,...Ch. 14 - Compute Divisional Income Refer to Exercise 14-22....Ch. 14 - Computing Divisional Income: Incomplete...Ch. 14 - Compute RI and ROI The Campus Division of...Ch. 14 - Prob. 26ECh. 14 - Compare Alternative Measures of Division...Ch. 14 - Comparing Business Units Using ROI Back Mountain...Ch. 14 - Comparing Business Units Using Residual Income...Ch. 14 - Prob. 30ECh. 14 - Universal Electronics, Inc. (UEI), which started...Ch. 14 - Comparing Business Units Using Residual...Ch. 14 - Comparing Business Units Using Economic Value...Ch. 14 - Impact of New Asset on Performance Measures The...Ch. 14 - Refer to the data in Exercise 14–34. The division...Ch. 14 - Refer to the information in Exercises 14–34 and...Ch. 14 - Impact of an Asset Disposal on Performance...Ch. 14 - Impact of an Asset Disposal on Performance...Ch. 14 - Compare Historical Cost, Net Book Value to Gross...Ch. 14 - Prob. 40ECh. 14 - Prob. 41ECh. 14 - Effects of Current Cost on Performance...Ch. 14 - Comparing Business Units Using Divisional Income,...Ch. 14 - Comparing Business Units Using Economic Value...Ch. 14 - Prob. 45PCh. 14 - Equipment Replacement and Performance Measures...Ch. 14 - Prob. 47PCh. 14 - Prob. 48PCh. 14 - Prob. 49PCh. 14 - Prob. 50PCh. 14 - Prob. 51PCh. 14 - Evaluate Performance Evaluation System: Behavioral...Ch. 14 - ROI, EVA, and Different Asset Bases Hys is a...Ch. 14 - Economic Value Added Bisbee Health Products...Ch. 14 - Prob. 55PCh. 14 - Prob. 56PCh. 14 - Refer to the information in Exercise 14-39. Assume...Ch. 14 - Refer to the information in Exercise 14-42. Assume...
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