Question

In: Accounting

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

Divisional Performance Analysis and Evaluation

The vice president of operations of Free Ride Bike Company is evaluating the performance of two divisions organized as investment centers. Invested assets and condensed income statement data for the past year for each division are as follows:

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

1.

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

2.

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 2 years ago
Next > < Previous

Related Solutions

Divisional Performance Analysis and Evaluation The vice president of operations of Free Ride Bike Company is...
Divisional Performance Analysis and Evaluation The vice president of operations of Free Ride Bike Company is evaluating the performance of two divisions organized as investment centers. Invested assets and condensed income statement data for the past year for each division are as follows: Road Bike Division Mountain Bike Division Sales $6,480,000 $6,860,000 Cost of goods sold 2,851,000 3,224,000 Operating expenses 2,527,400 2,607,000 Invested assets 5,400,000 4,900,000 Required: 1. Prepare condensed divisional income statements for the year ended December 31, 20Y7,...
Divisional Performance Analysis and Evaluation The vice president of operations of Free Ride Bike Company is...
Divisional Performance Analysis and Evaluation The vice president of operations of Free Ride Bike Company is evaluating the performance of two divisions organized as investment centers. Invested assets and condensed income statement data for the past year for each division are as follows: Road Bike Division Mountain Bike Division Sales $ 5,640,000 $ 5,850,000 Cost of goods sold 2,482,000 2,750,000 Operating expenses 2,142,800 2,164,000 Invested assets 4,700,000 3,900,000 Required: 1. Prepare condensed divisional income statements for the year ended December...
Divisional Performance Analysis and Evaluation The vice president of operations of Free Ride Bike Company is...
Divisional Performance Analysis and Evaluation The vice president of operations of Free Ride Bike Company is evaluating the performance of two divisions organized as investment centers. Invested assets and condensed income statement data for the past year for each division are as follows: Road Bike Division Mountain Bike Division Sales $ 2,860,000 $ 2,990,000 Cost of goods sold 1,258,000 1,405,000 Operating expenses 1,115,800 1,016,900 Invested assets 2,600,000 2,300,000 Required: 1. Prepare condensed divisional income statements for the year ended December...
The vice president of operations of Free Ride Bike Company is evaluating the performance of two...
The vice president of operations of Free Ride Bike Company is evaluating the performance of two divisions organized as investment centers. Invested assets and condensed income statement data for the past year for each division are as follows: Road Bike Division Mountain Bike Division Sales $2,970,000 $3,080,000 Cost of goods sold 1,307,000 1,448,000 Operating expenses 1,187,800 1,231,600 Invested assets 2,700,000 2,200,000 Required: 1. Prepare condensed divisional income statements for the year ended December 31, 20Y7, assuming that there were no...
The vice president of operations of Pavone Company is evaluating the performance of two divisions organized...
The vice president of operations of Pavone Company is evaluating the performance of two divisions organized as investment centers. Invested assets and condensed income statement data for the past year for each division are as follows: Business Division Consumer Division Sales $2,250,000 $2,550,000 Cost of goods sold 1,320,000 1,330,000 Operating expenses 705,000 914,000 Invested assets 978,261 2,833,333 Required: 1. Prepare condensed divisional income statements for the year ended December 31, assuming that there were no service department charges. 2. Using...
The vice president of operations of Recycling Industries is evaluating the performance of two divisions organized...
The vice president of operations of Recycling Industries is evaluating the performance of two divisions organized as investment centers. Invested assets and condensed income statement data for the past year for each division are as follows: Business Division Consumer Division Sales $42,800,000 $56,000,000 Cost of goods sold 23,500,000 30,500,000 Operating expenses 11,424,800 14,300,000 Invested assets 34,240,000 70,000,000 Required: 1. Prepare condensed divisional income statements for the year ended December 31, 20Y8, assuming that there were no service department charges. 2....
Katharine Rally is the vice president of operations for the ZUSH Company. She oversees operations at...
Katharine Rally is the vice president of operations for the ZUSH Company. She oversees operations at a plant that manufactures components for hydraulic systems. Katharine is concerned about the plant’s present production capability. She has reduced the decision situation to three alternatives. The first alternative, which is fully automation, would result in significant changes in present operations. The second alternative, which is semi- automation, involves fewer changes in present operations. The third alternative is to make no changes (do nothing)....
Katharine Rally is the vice president of operations for the XYZ Company. She oversees operations at...
Katharine Rally is the vice president of operations for the XYZ Company. She oversees operations at a plant that manufactures components for hydraulic systems. Katharine is concerned about the plant’s present production capability. She has reduced the decision situation to three alternatives. The first alternative, which is fully automation, would result in significant changes in present operations. The second alternative, which is semi-automation, involves fewer changes in present operations. The third alternative is to make no changes (do nothing). As...
Based on the following analysis of last year’s operations of Moline Inc., a financial vice president...
Based on the following analysis of last year’s operations of Moline Inc., a financial vice president of the company believes that the firm’s total net income could be increased by $500,000 if its design division were discontinued. (Amounts are given in thousands of dollars.) Totals All Other Divisions Design Division Sales $23,500 $18,000 $5,500 Product costs: Variable (9,500) (7,000) (2,500) Fixed (6,000) (5,000) (1,000) Gross profit $8,000 $6,000 $2,000 Operating expenses: Variable (4,200) (2,500) (1,700) Fixed (2,300) (1,500) (800) Net...
You are the Vice President of Operations for Willowbrook Company, a decentralized company that makes several...
You are the Vice President of Operations for Willowbrook Company, a decentralized company that makes several varieties of drinks (soft drinks, cider-based drinks, and coffee drinks). Each division is run as an investment center with the manager’s performance evaluation based on their division’s ROI. In addition to the information below, there are $320,000 in corporate costs, of which $190,000 are allocated to the divisions based on the number of units sold at each division. These costs are due to employee...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT