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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:

  1. Compute residual income for the three regions. Ignore taxes.

  2. How have these regions performed?

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