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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.

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Answer #1
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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