Question

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

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1. Remember operating income does not reflect the amount of assets invested in each division.

2. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for each division. Round percentages to one decimal place and the investment turnover to two decimal places.

Division	Profit Margin	Investment Turnover	ROI
Business Division	%		%
Consumer Division	%		%

3. If management desires a minimum acceptable return on investment of 10%, determine the residual income for each division.

	Residual Income
Business Division	$
Consumer Division	$

Answer 1

Recycling Industries Ans 1 Divisional Income Statements For the year ended December 31, 20Y8 Business Division Consumer Division Particulars Sales Cost of Good Sold Gross Profit Operating Expense Income From Operations $4,28,00,000 $2,35,00,000 $1,93,00,000 $1,14,24,800 $78,75,200 $5,60,00,000 $3,05,00,000 $2,55,00,000 $1,43,00,000 $1,12,00,000 Profit Margin Income from Operations/Sales Investment Turnover Sales/ Invested Assets ROI Profit Margin x Investment Turnover Business Division Ans 2 Consumer Division Particulars Profit Margin 18.4% 20.0% [$7875200 $42800000] [$11200000 $56000000] Investment Turnover Invested Assets Investment Turnover $3,42,40,000 $7,00,00,000 1.3 0.8 [$42800000/ 4240000] [$56000000 $70000000] 23.00% 16.00% ROI [20.0% x 0.8] [18.4% x 1.3] Ans 3 Residual Income Income from Operation (cost of capital x average invested Assets) Particulars Income from Operation Less: required income on invested assets @ 10% Business Division Consumer Division $78,75,200 $1,12,00,000 ($34,24,000) [$34240000 x 10%] $44,51,200 ($70,00,000) $70000000 x 10%] $42,00,000 Residual Income