Question

Divisional Income Statements and Return on Investment Analysis E. 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, 2018, are as follows: Mutual Fund Division Electronic Brokerage Division Investment Banking Division Fee revenue $760,000 $790,000 $790,000 Operating expenses 368,000 293,200 559,600 Invested assets 2,800,000 2,300,000 1,600,000 The management of E. Lynch Company is evaluating each division as a basis for planning a future expansion of operations. Required: 1. Prepare condensed divisional income statements for the three divisions, assuming that there were no service department charges

Answer 1

1.

Divisional Income Statement
	Mutual Fund Division	Electronic Brokerage Division	Investment Banking Division
Fee revenue	$760,000	$790,000	$790,000
Operating expenses	368,000	293,200	559,600
Income from Operations	$392,000	$496,800	$230,400

2.

	Profit Margin	=Income / Fee Revenue	Investment Turnover	=Fee revenue / Investment	ROI	=Income / Investment
Mutual Fund Division	51.58%	=392000/760000	0.27	=760000/2800000	14.00%	=392000/2800000
Electronic Brokerage Division	62.89%	=496800/790000	0.34	=790000/2300000	21.60%	=496800/2300000
Investment Banking Division	29.16%	=230400/790000	0.49	=790000/1600000	14.40%	=230400/1600000

3. When faced with limited funds for expansion, management should consider an expansion of the Electronic Brokerage Division first.