Exercise 14-32 (Algo) Comparing Business Units Using Residual Income (LO 14-3)

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	$ 1,203,000	$ 1,653,000	$ 2,253,000	$ 5,109,000
Cost of sales	451,500	811,500	1,141,500	2,404,500
Selling, General and Administrative (all fixed)	424,500	634,500	854,500	1,913,500
Corporate overhead				438,000

Information on the division assets in the three regions of Lauderdale Corporation follows:

Region I	$ 703,000
Region II	633,000
Region III	1,292,000

Lauderdale Corporation has a cost of capital of 8.6 percent.

Required:

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

B. How have these regions performed?

Complete this question by entering your answers in the tabs below.

• Required A
• Required B

Complete this question by entering your answers in the tabs below.

Compute residual income for the three regions. Ignore taxes. Note: Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.

How have these regions performed?

	Region I	Region II	Region III
Residual Income

How have these regions performed?

1a. Based on residual income, which region performed the best?
1b. Based on residual income, which region performed the worst?