Question

Divisional Income Statements and Return on Investment Analysis E.F. Lynch Company is a diversified investment company with three operating divisions organized as investment centers. Condensed data taken from the records of the three divisions for the year ended June 30, 20Y8, are as follows: Mutual Fund Division Electronic Brokerage Division Investment Banking Division Fee revenue $2,270,000 $2,360,000 $2,260,000 Operating 1,108,000 869,600 1,597,600 expenses Invested assets 8,300,000 6,900,000 4,600,000 The management of E.F. Lynch Company is evaluating each division as a basis for planning a future expansion of operations. Required:

Answer 1

Solution:

1. Condensed divisional income statements for the three divisions:

particulars	mutual fund division	electronic brokerage division	investment banking division
Fee revenue	22,70,000	23,60,000	22,60,000
Operating expenses	11,08,000	8,69,600	15,97,600
Income from operation	=fee revenue-operating exp=22,70,000-11,08,000=11,62,000	=fee revenue-operating =23,60,000-8,69,400=14,90,400	=fee revenue-operating =22,60,000-15,97,600=6,62,400

2. calculation of profit margin ,investment turnover,return on investment

particulars	profit margin	investment turnover	return on investment
Mutual fund division	=income from operation/fee revenue*100=11,62,000/22,70,000=51.2%	=fee revenuue/invested asset=22,70,000/83,00,000=0.3(0.27)	=profit margin*investment turnover=51.2*0.27=13.8%
Electronic brokerage division	=income from operation/fee revenue*100=14,90,400/23,60,000=63.1%	=fee revenuue/invested asset=23,60,000/69,00,000=0.3(0.34)	=profit margin*investment turnover=63.1*0.34=21.4%
Investment banking division	=income from operation/fee revenue*100=6,62,400/22,60,000=29.3%	=fee revenuue/invested asset=22,60,000/46,00,000=0.5(0.49)	=profit margin*investment turnover=29.3*0.49=14.3%

3.at the point when looked with constrained store for expansion,management ought to consider a development of the Electronic Brokerage Division first since its return for money invested is higher which will give better yield