Divisional Performance Analysis and Evaluation The vice president of operations of Free Ride Bike Company is...

Divisional Performance Analysis and Evaluation

	Road Bike Division	Mountain Bike Division
Sales	$ 3,480,000	$ 3,600,000
Cost of goods sold	1,531,000	1,692,000
Operating expenses	1,287,800	1,296,000
Invested assets	2,900,000	2,400,000

Required:

1. Prepare condensed divisional income statements for the year ended December 31, 20Y7, assuming that there were no service department charges.

Free Ride Bike Company
Divisional Income Statements
For the Year Ended December 31, 20Y7
	Road Bike Division	Mountain Bike Division
Sales	$	$
Cost of goods sold
Gross profit	$	$
Operating expenses
Income from operations	$	$

2. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and rate of return on investment for each division. If required, round your answers to one decimal place.

Division	Profit Margin	Investment Turnover	ROI
Road Bike Division	%		%
Mountain Bike Division	%		%

3. If management desires a minimum acceptable return of 12%, determine the residual income for each division. If required, use the minus sign to indicate a negative income.

Division	Residual Income
Road Bike Division	$
Mountain Bike Division	$

4. On the basis of income from operations, the Division is the more profitable of the two divisions. However, income from operations consider the amount of invested assets in each division. On the basis of residual income, the Division is the more profitable of the two divisions.

Solutions

Expert Solution

	Road Bike Division	Mountain Bike Division
Sales	$ 3,480,000	$ 3,600,000
Cost of Goods Sold	$ 1,531,000	$ 1,692,000
Gross Profit	$ 1,949,000	$ 1,908,000
Operating Expenses	$ 1,287,800	$ 1,296,000
Income from Operations	$ 661,200	$ 612,000

	Profit Margin	Investment Turnover	ROI
Road Bike Division	19.00%	1.2	22.80%
Mountain Bike Division	17.00%	1.5	25.50%

Profit Margin = Income from Operations / Sales
Investment Turnover = Sales / Invested Assets
ROI = Profit Margin x Investment Turnover

3. Residual Income = Income from Operations - Invested Assets x Minimum rate of return
Road Bike Division = $661200 - 2900000 x 12% = $313200
Mountain Bike Division = $612000 - 2400000 x 12% = $324000

4. On the basis of income from operations, the Road Bike Division is the more profitable of the two divisions. However ROI consider the amount of invested assets in each division. On the basis of residual income, the Mountain Bike Division is the more profitable of the two divisions.

ekkarill92 answered 1 year ago

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