Lauderdale Corporation is organized in three geographical divisions (regions) with managers responsible for revenues, costs,...
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Accounting
Lauderdale Corporation is organized in three geographical divisions (regions) with managers responsible for revenues, costs, and assets in their respective regions. The firm is highly decentralized and managers are evaluated solely on divisional performance. Corporate overhead (all fixed) is allocated to the regions based on regional gross margin (regional revenue minus regional cost of sales).
The following information is from Lauderdale's first year of operations:
Region I
Region II
Region III
Total Corporation
Revenues
$ 1,200,000
$ 1,650,000
$ 2,250,000
$ 5,100,000
Cost of sales
450,000
810,000
1,140,000
2,400,000
Selling, General and Administrative (all fixed)
420,000
630,000
850,000
1,900,000
Corporate overhead
432,000
Information on the division assets in the three regions of Lauderdale Corporation follows:
Region I
$ 700,000
Region II
630,000
Region III
1,287,500
Lauderdale Corporation has a cost of capital of 8.6 percent.
Required:
Compute residual income for the three regions. Ignore taxes.
How have these regions performed?
Answer & Explanation
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