nance Evaluation for Decentralized Operations sn on investment analysis o81.4 PR

Question

nance Evaluation for Decentralized Operations sn on investment analysis o81.4 PR 8-3B Divisional income statements and zsto i E.F. Lynch Company is a diversified investment con pany with three operating divisions organized as investment centers. Condensed data taken from the records of the three divisions for the year ended June 30, 2016, are as follows: Electronic Brokerage Investment Banking Division Mutual Fund Fee revenue Operating expenses Invested assets Division $4,140,000 2,980,800 5,175,000 Division $3,360,000 3,091,200 1,120,000 $4,560,000 3,739,200 3,800,000 The management of E.F. Lynch Company is evaluating each division as a basis for plan- ning a future expansion of operations. Instructions 1. Prepare condensed divisional income statements for the three divisions, assuming that there were no service department charges. 2. Using the DuPont formula for rate of return on investment, compute the profit margn 3.If available funds permit the expansion of operations of only one divisiod investment turnover, and rate of return on investment for each division. which of the divisions would you recommend for expansion, based on parts (2)? Explain.

Explanation / Answer

1 Condensed Divisional Income Statements Particulars Mutual Fund Division Electronic Brokerage Division Investment Banking Division Fee Revenue 4140000 3360000 4560000 Operating Expenses 2980000 3091200 3739200 Net Revenue 1160000 268800 820800 2 Rate of Return on Inv Net Revenue 1160000 268800 820800 Invested Asset 5175000 1120000 3800000 i) ROI 22.42 24 21.6 ii) Profit Margin 28.02 8 18 iii) Rate of Return Consolidated 2249600 22.2843 10095000 3 Rate of Return on Investment & Profit Margin is higher in Mutal Fund Division ,Hence it is Better to Invest in MF and Diversion from Electronic Brokeage Division is also Suggestable

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