Question

The Whole Life Baked Goods Company is a diversified food company that specializes in all natural foods. The company has three operating divisions organized as investment centers. Condensed data taken from the records of the three divisions for the year ended June 30, 20Y7, are as follows:

	Cereal Division	Snack Cake Division	Retail Bakeries Division
Sales	$17,600,000	$18,000,000	$9,520,000
Cost of goods sold	10,600,000	12,550,000	6,630,000
Operating expenses	6,120,000	4,730,000	2,318,800
Invested assets	8,000,000	6,000,000	6,800,000

The management of The Whole Life Baked Goods 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.
2.	Using the DuPont formula for return on investment, compute the profit margin, investment turnover, and return on investment for each division. If required, round your final answer to one decimal place.
3.	If available funds permit the expansion of operations of only one division, which of the divisions would you recommend for expansion?

Answer 1

Answer 1

Whole Life Baked Goods Company

Divisional income statement

For the year ended June 30, 20Y7

Particular		Snack Cake Division ($)	Retail Bakeries Division ($)
Sales	17,600,000	18,000,000	9,520,000
Less : Cost of goods sold	(10,600,000)	(12,550,000 )	(6,630,000)
Gross Profit	7,000,000	5,450,000	2,890,000
Less :Operating expenses	(6,120,000)	(4,730,000)	(2,318,800)
Income from operations	$880,000	$720,000	$571,200

Answer 2

Divisions	Profit Margin = (Income from operation / Sales) * 100	Investment Turnover = (Sales / Invested assets)	ROI =  (Income from operation / Invested assets) * 100
Cereal Division	($880,000 / $17,600,000 ) *100 = 5%	$17,600,000 / $8,000,000 = 2.2	($880,000 / $8,000,000) *100 =11 %
Snack Cake Division	($720,000 / $18,000,000) *100 =4 %	$18,000,000 / $6,000,000 = 3	($720,000 / $6,000,000) *100 = 12%
Retail Bakeries Division	($571,200 / $9,520,000 ) *100 = 6%	$9,520,000 / $6,800,000 = 1.4	($571,200 / $6,800,000 ) *100 = 8.4%

Cross Check : Profit Margin * Investment Turnover = ROI

• Cereal Division : 5% * 2.2 = 11 %
• Snack Cake Division = 4 % * 3 = 12 %
• Retail Bakeries Division = 6 % * 1.4 = 8.4 %

Answer 3

If available funds permit the expansion of operations of only one division , then it is advisable to select Snack Cake Division for expansion as it has highest ROI among the three divisions.