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Universal Electronics, Inc
Universal Electronics, Inc. (UEI), which started operations one year ago, has two divisions: Consumer and Commercial. Both divisions invest heavily in R&D, which is assumed to benefit five years. R&D spending is made uniformly throughout the year. UEI has a cost of capital of 11 percent. Selected financial information for the two divisions (in thousands of dollars) for the year just completed follows.
Consumer Commercial $37,000
Sales revenue $22,000 $37,000
Divisional income 3,850 3,885
Divisional investment 27,500 27,750
Current liabilities 1,000 800
R&D 1,000 1,000
Required: Evaluate the performance of the two divisions assuming UEI uses residual income. (Enter your answers in dollars rounded to 1 decimal place.)
Expert Solution
Computation of the residual income (RI) for consumer division:-
Residual income = Operating income - (Invested funds*Required rate of return)
= $3,850 - ($27,500 * 11%)
= $3,850 - $3,025
= $825.0
Computation of the residual income (RI) for commercial division:-
Residual income = Operating income - (Invested funds*Required rate of return)
= $3,885 - ($27,750 * 11%)
= $3,885 - $3,052.5
= $832.5
Commercial division performed better as it has higher RI
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