- Colonial Pharmaceuticals Is A Small Firm Specializing In New Products It Is Organized Into Two Divisions Which Are Bas 1 (101.55 KiB) Viewed 93 times
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 10 percent cost of capital and uses beginning-of-the-year investment when computing ROI and residual income. Ignore income taxes. AC Division $ 650 3,300 10,000 Allocated corp. overhead Cost of goods sold Divisional investment R&D Sales SG&A SO Division $ 1,300 6,000 75,000 3,150 19,500 1,030 2,500 10,000 850 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 year. Assume there are no current liabilities and (unrealistically) that no R&D investments had taken place before this year. Required: a. Compute EVA for the two divisions. (Do not round intermediate calculations.) AC Division SO Division Economic value added