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

Calculate divisional income, operating margin, ROI, and residual income for two divisions of Wellness Pharmaceuticals. Analyze the financial performance of the two divisions based on your review of their selected financial data. Explain the current financial situation for each division in two or more paragraphs.

Part 3 Scenario

Wellness Pharmaceuticals is a small firm specializing in new products. It is organized into two divisions, which are based on the products they produce. BD Division is smaller and the life of the products it produces tend to be shorter than those produced by the larger PM Division. Selected financial data for the past year is shown below. Divisional investment is as of the beginning of the year. Wellness Pharmaceuticals uses a 9 percent cost of capital and uses beginning-of-the-year investment when computing ROI and residual income. Ignore income taxes.

Wellness Pharmaceuticals: Selected Financial Data

Item

BD Division

PM Division

Allocated Corporate Overhead

$660

$1,980

Cost of Goods Sold

$3,520

$7,700

Divisional Investment

$9,900

$88,000

Research and Development

$2,200

$3,960

Sales

$8,800

$2,200

SG&A

$770

$1,680

Complete the following:

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

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