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 agoRelated 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
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Divisional Performance Analysis and Evaluation The vice president of operations of Free Ride Bike Company is...
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centers. Invested assets and condensed income statement data for
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Road Bike Division
Mountain Bike Division
Sales
$ 2,860,000
$ 2,990,000
Cost of goods sold
1,258,000
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