Question
In: Accounting
Divisional Income Statements and Return on Investment Analysis E.F. Lynch Company is a diversified investment company...
Divisional Income Statements and Return on Investment Analysis
E.F. Lynch Company is a diversified investment company with three operating divisions organized as investment centers. Condensed data taken from the records of the three divisions for the year ended June 30, 20Y8, are as follows:
Mutual Fund Division |
Electronic Brokerage Division |
Investment Banking Division |
||||
| Fee revenue | $1,610,000 | $1,680,000 | $1,620,000 | |||
| Operating expenses | 866,600 | 798,000 | 1,224,000 | |||
| Invested assets | 5,900,000 | 4,900,000 | 3,300,000 | |||
The management of E.F. Lynch Company is evaluating each division as a basis for planning a future expansion of operations.
Required:
1. Prepare condensed divisional income statements for the three divisions, assuming that there were no service department charges.
| E.F. Lynch Company | |||
| Divisional Income Statements | |||
| For the Year Ended June 30, 20Y8 | |||
| Mutual Fund Division | Electronic Brokerage Division | Investment Banking Division | |
| Fee revenue | $ | $ | $ |
| Operating expenses | |||
| Income from operations | $ | $ | $ |
2. Using the DuPont formula for rate of return on investment, compute the profit margin, investment turnover, and rate of return on investment for each division. Round your answers to one decimal place.
| Division | Profit Margin | Investment Turnover | ROI |
| Mutual Fund Division | % | % | |
| Electronic Brokerage Division | % | % | |
| Investment Banking Division | % | % |
3. When faced with limited funds for expansion, management should consider an expansion of the Division first.
Solutions
Expert Solution
1.
| E.F. Lynch Company | |||
| Divisional income statements | |||
| For the year ended June 30,2008 | |||
| Mutual Fund division | Electronic Brokerage Division | Investment Banking Division | |
| Fee revenue | 1,610,000 | 1,680,000 | 1,620,000 |
| Operating expenses | - 866,600 | - 798,000 | - 1,224,000 |
| Income from operations | $743,400 | $882,000 | $396,000 |
2.
Mutual Fund Division
Profit margin = Income from operations/Fee revenue
= 743,400/1,610,000
= 46.17%
Investment turnover = Fee revenue/Invested assets
= 1,610,000/5,900,000
= 0.27
ROI = Income from operations/Invested assets
= 743,400/5,900,000
= 12.6%
Electronic Brokerage Division
Profit margin = Income from operations/Fee revenue
= 882,000/1,680,000
= 52.5%
Investment turnover = Fee revenue/Invested assets
= 1,680,000/4,900,000
= 0.34
ROI = Income from operations/Invested assets
= 882,000/4,900,000
= 18%
Investment Banking Division
Profit margin = Income from operations/Fee revenue
= 396,000/1,620,000
= 24.44%
Investment turnover = Fee revenue/Invested assets
= 1,620,000/3,300,000
= 0.49
ROI = Income from operations/Invested assets
= 396,000/3,300,000
= 12%
| Division | Profit margin | Investment turnover | ROI |
| Mutual Fund Division | 46.17% | 0.27 | 12.6% |
| Electronic Brokerage Division | 52.5% | 0.34 | 18% |
| Investment Banking Division | 24.44% | 0.49 | 12% |
3.
Since ROI of Electronic Brokerage Division is highest, hence in case of shortage of funds, it should be expanded first.
Kindly give a positive rating if you are satisfied with the answer. Feel free to ask if you have any doubts. Thanks.
ekkarill92 answered 2 years agoRelated Solutions
Divisional Income Statements and Return on Investment Analysis E.F. Lynch Company is a diversified investment company...
Divisional Income Statements and Return on Investment
Analysis
E.F. Lynch Company is a diversified investment company with
three operating divisions organized as investment centers.
Condensed data taken from the records of the three divisions for
the year ended June 30, 20Y8, are as follows:
Mutual Fund
Division
Electronic
Brokerage
Division
Investment
Banking
Division
Fee revenue
$740,000
$790,000
$740,000
Operating expenses
399,800
376,000
560,000
Invested assets
2,700,000
2,300,000
1,500,000
The management of E.F. Lynch Company is evaluating each division
as a...
Divisional Income Statements and Return on Investment Analysis E.F. Lynch Company is a diversified investment company...
Divisional Income Statements and Return on Investment
Analysis
E.F. Lynch Company is a diversified investment company with
three operating divisions organized as investment centers.
Condensed data taken from the records of the three divisions for
the year ended June 30, 20Y8, are as follows:
Mutual Fund Division
Electronic Brokerage Division
Investment Banking Division
Fee revenue
$1,010,000
$1,060,000
$1,030,000
Operating expenses
543,800
446,200
778,000
Invested assets
3,700,000
3,100,000
2,100,000
The management of E.F. Lynch Company is evaluating each division
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