Exercise 14-29 (Static) Comparing Business Units Using Residual Income (LO 14-3)

Back Mountain Industries (BMI) has two divisions: East and West. BMI has a cost of capital of 15 percent. Selected financial information (in thousands of dollars) for the first year of business follows:

	East			West
Sales revenue	$	1,000		$	5,000
Income		200			390
Investment (beginning of year)		2,000			3,000
Current liabilities (beginning of year)		200			200
R&D expendituresa		500			400

^aR&D is assumed to benefit two periods. All R&D is spent at the beginning of the year.

Required:

a-1. Evaluate the performance of the two divisions assuming BMI uses residual income. (Enter answers in thousands of dollars. Negative amounts should be indicated by a minus sign.)

a-2. Which division had the better performance?

multiple choice

East

West