Divisional Performance Analysis and Evaluation The vice president of operations of Free Ride Bike Company is...
Divisional Performance Analysis and Evaluation
The vice president of operations of Free Ride Bike Company 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:
| Road Bike Division | Mountain Bike Division | |||
| Sales | $ 5,760,000 | $ 6,100,000 | ||
| Cost of goods sold | 2,534,000 | 2,867,000 | ||
| Operating expenses | 2,304,400 | 2,013,000 | ||
| Invested assets | 4,800,000 | 6,100,000 | ||
Required:
1. Prepare condensed divisional income statements for the year ended December 31, 20Y7, assuming that there were no service department charges.
| Free Ride Bike Company | ||
| Divisional Income Statements | ||
| For the Year Ended December 31, 20Y7 | ||
| Road Bike Division | Mountain Bike Division | |
| Sales | $ | $ |
| Cost of goods sold | ||
| Gross profit | $ | $ |
| Operating expenses | ||
| Income from operations | $ | $ |
2. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and rate of return on investment for each division. If required, round your answers to one decimal place.
| Division | Profit Margin | Investment Turnover | ROI |
| Road Bike Division | % | % | |
| Mountain Bike Division | % | % |
3. If management desires a minimum acceptable rate of return of 18%, determine the residual income for each division. If required, use the minus sign to indicate a negative income.
| Residual Income | |
| Road Bike Division | $ |
| Mountain Bike Division | $ |
4. On the basis of income from operations, the Division is the more profitable of the two divisions. However, income from operations 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.
Homework Answers
| Requirement -1: Divisional Income Statement | ||
| Road Bike Division | Mountain Bike Division | |
| Sales | $5,760,000 | $6,100,000 |
| Cost of Goods Sold | -$2,354,000 | -$2,867,000 |
| Gross Profit | $3,406,000 | $3,233,000 |
| Operating Expense | -$2,304,400 | -$2,013,000 |
| Net Income | $1,101,600 | $1,220,000 |
| Requirement-2 | ||
| Road Bike Division | Mountain Bike Division | |
| Profit Margin (a) | 19.13% | 20.00% |
| Asset Turnover Ratio (b) | 1.2 | 1.00 |
| Return on Investment (axb) | 22.95% | 20.00% |
| Requirement-3 | ||
| Road Bike Division | Mountain Bike Division | |
| Invested Assets (a) | $4,800,000 | $6,100,000 |
| Accepted rate of Return (b) | 18% | 18% |
| Expected Net Income (c=axb) | $864,000 | $1,098,000 |
| Actual Net Income (d) | $1,101,600 | $1,220,000 |
| Residual Income (d-c) | $237,600 | $122,000 |
| Working Note-1 | ||
| Road Bike Division | Mountain Bike Division | |
| Net Income (a) | $1,101,600 | $1,220,000 |
| Invested Assets (b) | $4,800,000 | $6,100,000 |
| Return On Investment (axb) | 22.95% | 20.00% |
| Working Note-2 | ||
| Road Bike Division | Mountain Bike Division | |
| Net Income (a) | $1,101,600 | $1,220,000 |
| Sales (b) | $5,760,000 | $6,100,000 |
| Profit Margin (axb) | 19.13% | 20.00% |
| Working Note-3 | ||
| Road Bike Division | Mountain Bike Division | |
| Sales (a) | $5,760,000 | $6,100,000 |
| Invested Assets (b) | $4,800,000 | $6,100,000 |
| Asset Turnover Ratio (a/b) | 1.2 | 1.00 |
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