Question

Divisional Performance Analysis and Evaluation

The vice president of operations of Recycling Industries is evaluating the performance of two divisions organized as investment centers. Invested assets and condensed income statement data for the past year for each division are as follows:

	Business Division		Consumer Division
Sales	$42,800,000		$56,000,000
Cost of goods sold	23,500,000		30,500,000
Operating expenses	11,424,800		14,300,000
Invested assets	34,240,000		70,000,000

Required:

1. Prepare condensed divisional income statements for the year ended December 31, 20Y8, assuming that there were no support department allocations.

Recycling Industries
Divisional Income Statements
For the Year Ended December 31, 20Y8
	Business Division	Consumer Division
Sales	$	$
Cost of goods sold
Gross profit	$	$
Operating expenses
Operating income	$	$

2. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for each division. Round percentages to one decimal place and the investment turnover to two decimal places.

Division	Profit Margin	Investment Turnover	ROI
Business Division	%		%
Consumer Division	%		%

3. If management desires a minimum acceptable return on investment of 10%, determine the residual income for each division.

	Residual Income
Business Division	$
Consumer Division	$

4. On the basis of operating income, the   Division is the more profitable of the two divisions. However, operating income   consider the amount of invested assets in each division. On the basis of residual income, the   Division is the more profitable of the two divisions.

Answer 1

1	Income Statement
		Business Division	Consumer Division
	Sales	$4,28,00,000	$5,60,00,000
Less:	Cost of goods sold	$2,35,00,000	$3,05,00,000
Less:	Operating expenses	$1,14,24,800	$1,43,00,000
	Net Operating Income	$78,75,200	$1,12,00,000
2	Average Invested Assets	$3,42,40,000	$7,00,00,000
	Margin =Net operating income / Net Sales	18.40%	20.00%
	Turnover =Net sales / Average Operating Assets	1.3	0.8
	ROI =Margin*Turnover	23.0%	16.0%
3	Residual income of last year =Net operating income of last year -(Average operating assets*10.00%)	$44,51,200	$42,00,000
4	As per the Profit Margin measure Consumer division is better than Business division
	When it comes to the Asset Turnover ratio then Business division is much better then consumer division
	which means that Business division is using its assets more efficiently then consumer division to generate sales.
	Similarly, due to this superior Asset Turnover ratio ROI of Business division is much better.
	On the basis of Residual Income Business division is better than Consumer division