The Norse Division of Gridiron Concepts Inc. experienced significant revenue and

Question

The Norse Division of Gridiron Concepts Inc. experienced significant revenue and profit growth from 20Y4 to 20Y6 as shown in the following divisional income statements:

Income from operations         

There are no service department charges, and the division operates as an investment center that must maintain a 15% return on invested assets.

Instructions: Determine the profit margin, investment turnover, and return on investment for the Norse Division for 20Y4-20Y6. Based on your calculations, write a paragraph or two to the president of Gridiron Concepts Inc., Knute Holz, evaluating the division's performance.

20Y4 20Y5 20Y6 Sales $ 1,470,000          $ 2,100,000        $ 2,450,000        Cost of goods sold         1,064,000     1,498,000     1,680,000 Gross profit        406,000        602,000        770,000 Operating expenses        185,500         224,000        231,000

Income from operations         

    $ 220,500      $ 378,000     $ 539,000 Invested assets      $735,000    $1,500,000 $3,500,000

Explanation / Answer

Solution:

Paragraph to president of Gridiron Concept Inc.:

Sir we have evaluated performance of Norse division and noticed that Profit margin was increase from 15% to 22% during 20Y4 to 20Y6. However investment turnover was decreased from 2 time to 0.7 times during 20Y4 to 20Y6. Further return on invested is also decreased from 30% to 15.40% during 20Y4 to 20Y6. Still we are able to maintain minimum 15% return on invested assets. from this analysis it seems that division needs improvement in terms of effective utilization of invested assets to grow sales and operating income for the company.

Computation of Ratios - Norse Division Particulars 20Y4 20Y5 20Y6 Income from operations $220,500.00 $378,000.00 $539,000.00 Sales $1,470,000.00 $2,100,000.00 $2,450,000.00 Profit Margin (Income from operation / Sales) 15.00% 18.00% 22.00% Sales $1,470,000.00 $2,100,000.00 $2,450,000.00 Invested Assets $735,000.00 $1,500,000.00 $3,500,000.00 Investment Turnover ( Sales / Invested Assets) 2.00 1.40 0.70 Income from operations $220,500.00 $378,000.00 $539,000.00 Invested Assets $735,000.00 $1,500,000.00 $3,500,000.00 Return on investment ( Income from operation / Invested Assets) 30.00% 25.20% 15.40%

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