Question

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, assuming that there were no support department allocations.

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
Operating income	$	$

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 rate of return of 19%, determine the residual income for each division.

	Residual Income
Road Bike Division	$
Mountain Bike Division	$

4. On the basis of operating income, the   Division is the more profitable of the two divisions. However, operating income   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.

Answer 1

1)
Condensed Divisional Income Statements
	Road Bike Division	Mountain Bike Division
Sales	$ 6,480,000	$ 6,860,000
Less: Cost of goods sold	($ 2,851,000)	($ 3,224,000)
Less: Operating expense	( $ 2,527,400)	( $2,607,000)
Net Opearting income	$ 1,101,600	$ 1,029,000
2)
	Road Bike Division	Mountain Bike Division
Profit margin       = Net income /sales	17% ( $ 1,101,600 / $ 6,480,000)	15% ( $ 1,029,000 / $ 6,860,000)
Investment turnover         = Sales / Invested assets	1.2 ( $ 6,480,000 / $ 5,400,000 )	1.4 ( $ 6,860,000 / $ 4,900,000 )
ROI      = Net income / Invested assets	20.4% ( $ 1,101,600 / $ 5,400,000)	21% ( $ 1,029,000 / $ 4,900,000 )
3)
Residual income = Net income (-)    (Minimum rate or return x Average Invested asset)	Road Bike Division	Mountain Bike Division
Residual income	$ 75,600 ( $ 1,101,600 (-) [ $ 5,400,000 x 19% ]	$ 98,000 ( $ 1,029,000 (-) [$ 4,900,000 x 19% ]
4)
On the basis of operating income, the   Road Bike Division is the more profitable of the two divisions. However, operating income   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