Question

i need help woth the following

The vice president of operations of Pavone 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: Business Division Consumer Division Sales $2,070,000 $2,490,000 Cost of goods sold 1,250,000 1,330,000 Operating expenses 613,000 811,400 Invested assets 862,500 2,766,667 Required: 1. Prepare condensed divisional income statements for the year ended December 31, 2016, assuming that there were no service department charges. 2. Using the DuPont formula for rate of return on investment, determine the profit margin, investment turnover, and rate of return on investment for each division. If required, round your final answer to one decimal place. 3. If management desires a minimum acceptable rate of return of 19.00 %, determine the residual income for each division. Use the minus sign to indicate a negative income. 4. Discuss the evaluation of the two divisions, using the performance measures previously determined. 1. Prepare condensed divisional income statements for the year ended December 31, 2016, assuming that there were no service department charges. PAVONE COMPANY Divisional Income Statements For the Year Ended December 31, 2016 Consumer Business Division Division 2 Sales Cost of goods sold 3 Gross profit Operating expenses Income from operations 2. Using the DuPont formula for rate of return on investment, determine the profit margin, investment turnover, and rate of return on investment for each division. If required, round your final answer to one decimal place. Profit Margin Investment Turnover ROI Business Division Consumer Division 3. If management desires a minimum acceptable rate of return of 19.00 % , determine the residual income for each division. Use the minus sign to indicate a negative income. Residual Income Business Division S Consumer Division 4. Discuss the evaluation of the two divisions, using the performance measures previously determined. On the basis of income from operations, the Division is more profitable. However, income from in each division. On the basis of the rate of return on operations does not consider the amount of in Division i Consumer le. Even though the Division has a higher investment, the Division investment turnover, which generates the higher rate of return on profit margin, the Business investment. On the basis of residual income, Division profitable of the two divisions

Answer 1

Answer 1.

PAVONE COMPANY Divisional Income Statements For the Year Ended December 31, 2016 Business Consumer Division Division 2,070,000 $2,490,000 1,250,000 $1,330,000 Sales Cost of goods sold Gross profit Operating expenses Income from operations 820,000 $ $ $ 1,160,000 613,000 $ 207,000 $ 811,400 348,600

Answer 2.

Business Division:

Profit Margin = Income from Operations / Sales
Profit Margin = $207,000 / $2,070,000
Profit Margin = 10%

Investment Turnover = Sales / Invested Assets
Investment Turnover = $2,070,000 / $862,500
Investment Turnover = 2.40

Rate of Return on Investment = Profit Margin * Investment Turnover
Rate of Return on Investment = 10% * 2.40
Rate of Return on Investment = 24%

Consumer Division:

Profit Margin = Income from Operations / Sales
Profit Margin = $348,600 / $2,490,000
Profit Margin = 14%

Investment Turnover = Sales / Invested Assets
Investment Turnover = $2,490,000 / $2,766,667
Investment Turnover = 0.90

Rate of Return on Investment = Profit Margin * Investment Turnover
Rate of Return on Investment = 14% * 0.90
Rate of Return on Investment = 12.60%

Answer 3.

Business Division:

Residual Income = Income from Operations - Minimum Acceptable Return * Invested Assets
Residual Income = $207,000 - 0.19 * $862,500
Residual Income = $43,125

Consumer Division:

Residual Income = Income from Operations - Minimum Acceptable Return * Invested Assets
Residual Income = $348,600 - 0.19 * $2,766,667
Residual Income = -$177,067

Answer 4.

On the basis of income from operations, the Consumer Division is more profitable. However, income from operations does not consider the amount of investments in each division. On the basis of the rate of return on investment, the Business Division is more profitable. Even though the Consumer Division has a higher profit margin, the Business Division has a higher investment turnover, which generates the higher rate of return on investment. On the basis of residual income, the Business Division is the more profitable of the two divisions.