the Vice President If operations of free rides wlli did o be in- e to increase t

ID: 2520176 • Letter: T

Question

the Vice President If operations of free rides wlli did o be in- e to increase to meet the president's . Wnican 5. If the Electronics Division were in an induštly creased, how much would the investment turnover hav required 20% return on investment? (Round to one decimal place.) PR 23-5B Divisional performance analysis and evaluation The vice president of operations of Free Ride Bike Co two divisions organized as investment centers. Invested assets and condensed data for the past year for each division are as follows: Obj. 4 mpany is evaluating the performance of income statement Bike 096 Sales Cost of goods sold Operating expenses Invested assets Road Bike Division $1,728,000 1,380,000 175,200 1,440,000 Mountain Bike Division $1,760,000 1,400,000 236,800 800,000 ATE Instructions 1. Prepare condensed divisional income statements for the year ended December 31, 2017, assuming that there were no service department charges. 2. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for each division. (Round percentages and the invest- ment turnover to one decimal place.) income for each division. termined in parts (D, (2), and 3). 3. If management's minimum acceptable return on investment is 10%, determine the residual 4. Discuss the evaluation of the two divisions, using the performance measures de-

Explanation / Answer

ANswer:

Divisional Income Statement

For the Year Ended December 31

Personal
Computing

Business Computing

Sales

1,728,000

1,760,000

Cost of goods sold

1,380,000

1,400,000

Income from operation before
operating expanses

348,000

360,000

operating expanses

175200

236800

Income from Operations

172,800

123,200

Rate of Return = Profit Margin x investment turnover

Rate of Return= income from operations/sales x sales/invested assets

Personal Computing: $172,800/$1728,000 x $1728,000/$1440,000

10% x 1.2

ROI = 12%

Business Computing: $123,200/$1,760,000 x $1760,000/$800,000

7%x2.2

ROI= 15.4%

If management’s minimum acceptable rate of return is 10%, determine the residual income for each division

Personal Computing: $172,800 – (10% x $1,440,000)= $28,800

Business Computing: $123,200- (10% x $800,000) = $43,200

It appears that the income from operations is greater for the Personal Computing division, however the Business Computing division has a higher rate of return on their investment- thus in the long run they will inevitable make more money

Residual Income is Higher in Business Computing this is because invested assets are less in that devision