The vice president of operations of Free Ride Bike Company is evaluating the per

Question

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: Instructions 1. Prepare condensed divisional income statements for the year ended December 31, 2014, 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. 3. If management's minimum acceptable rate of return is 10%, determine the residual income for each division. 4. Discuss the evaluation of the two divisions, using the performance measures determined in parts (1), (2), and (3).

Explanation / Answer

1)Divisional income statement:

2)

= .10 or 10%

3)Residual income = Net income - (Hurdle rate *Invested asset)

Road bike = 172800 - (.10*1440000)

               = $ 28800

Mountain bike = 123200 - (800000*.10)

                   =43200

4)Division Road bike performs better in terms of net operating income and Profit margin .Whereas Mountain bike division performs better in terms of ROI ,Investment turnover ad residual income

Road Bike Mountain Bike sales 1,728,000 1,760,000 Less:cost of goods sold - 1,380,000 - 1,400,000 Operating expense -175,200 - 236,800 Net income 172,800 123200

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