Question

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 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 return on investment (ROI).

Answer 1

Answer:

Investments in both divisions are performing equally well at the ROI of 14% each.

Explanation:

The financial data in the question are merged together and they are first sorted before the question is answered as follows:

                                               Consumer ($)            Commercial ($)

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

The answers are now as follows:

Divisional ROI = Divisional income / Divisional investment

Consumer division ROI = $3,850 / $27,500 = 0.1400, or 14%

Commercial division ROI = $3,885 / $27,750 = 0.1400, or 14%

This shows that investments in both divisions are performing equally well at the ROI of 14% each.