The Crunchy Granola Company is a diversified food company that specializes in al

Question

The Crunchy Granola Company is a diversified food company that specializes in all natural foods. The company has 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: Cereal Division Snack Cake Division Retail Bakeries Division Sales Cost of goods sold Operating expenses Invested assets $27,500,000 16,690,000 8,610,000 9,166,667 $8,020,000 5,595,000 1,703,200 2,673,333 $9,650,000 6,710,000 2,457,500 3,216,667 The management of The Crunchy Granola Company is evaluating each division as a basis for planning a future expansion of operations.

Explanation / Answer

1.

2. DuPont formula:

Rate of return on investment = Profit margin x Investment turnover

Profit margin = Net income / Sales

Investment turnover = Sales / Total assets

3. The division recommended for expansion would be the Snack Cake Division since it generates the highest rate of return on investment of 27% as compared to the other two divisions.

The Crunchy Granola Company Condensed Divisional Income Statements Cereal Division Snack Cake Division Retail Bakeries Division Sales $ 27500000 8020000 9650000 Cost of goods sold 16690000 5595000 6710000 Gross profit 10810000 2425000 2940000 Operating expenses 8610000 1703200 2457500 Net income 2200000 721800 482500

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