Question

Divisional Performance Analysis and Evaluation
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 $42,800,000 Sales Cost of goods sold Operating expenses Invested assets 23,500,000 11,424,800 34,240,000 $56,000,000 30,500,000 14,300,000 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 छा

Answer 1

divisional income statement
particular	business division	consumer division
sale	4,28,00,000	5,60,00,000
cost of goods sold	2,35,00,000	3,05,00,000
gross profit	1,93,00,000	2,55,00,000
operating expense	1,14,24,800	1,43,00,000
operating income	78,75,200	1,12,00,000

business division

profit margin = net profit / sale x 100

= 78,75,200 / 4,28,00,000 x 100

= 18.4%

investment turnover = income / invested assets

= 78,75,200 / 34,240,000

= 0.23

ROI = Return / investment x 100

= 78,75,200 / 34,240,000 x 100

= 23%

consumer division

profit margin = net profit / sale x 100

= 1,12,00,000 / 5,60,00,000 x 100

= 20%

investment turnover = income / invested assets

= 1,12,00,000 / 70,000,000

= 0.16

ROI = Return / investment x 100

= 1,12,00,000 / 70,000,000 x 100

= 16%

division	profit margin	investment turnover	ROI
business	18.40%	0.23	23%
consumer	20%	0.16	16%

business division

residual income = operating income -(minimum required return x invested assets)

= 78,75,200 - (10% x 34,240,000)

= 78,75,200 - 3,424,000

= 4,451,200

consumer division

residual income = operating income -(minimum required return x invested assets)

= 1,12,00,000 - (10% x 70,000,000)

= 1,12,00,000 - 7,000,000

= 4,200,000

on the basis of net operating income consumer division is more profitable. on the basis of residual income business division is more profitable