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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 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 rate of return of 19%, determine the residual income for each division. If required, use the minus sign to indicate a negative income.

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

Divisional income statement

Road Bike Division Mountain Bike Division
Sales 5640000 5850000
Cost of goods sold 2482000 2750000
Gross profit 3158000 3100000
Operating expense 2142800 2164000
Income from operation 1015200 936000

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 1015200/5640000 = 18% 5640000/4700000 = 1.2 18*1.2 = 21.6%
Mountain bike division 936000/5850000 = 16% 5850000/3900000 = 1.5 16%*1.5 = 24%

3. If management desires a minimum acceptable rate of return of 19%, determine the residual income for each division. If required, use the minus sign to indicate a negative income.

Residual income
Road bike division (4700000*19%-1015200) = 122200
Mountain bike division (3900000*19%-936000) = 195000

4) On the basis of income from operation = Road bike division prefer

On the basis of residual income = Mountain bike division prefer

ekkarill92 answered 2 years ago
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