Question
In: Accounting
The vice president of operations of Free Ride Bike Company is evaluating the performance of two...
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 | $2,970,000 | $3,080,000 | ||
| Cost of goods sold | 1,307,000 | 1,448,000 | ||
| Operating expenses | 1,187,800 | 1,231,600 | ||
| Invested assets | 2,700,000 | 2,200,000 | ||
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 20%, 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.
Solutions
Expert Solution
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 | $2970000 | $3080000 |
| Cost of goods sold | 1307000 | 1448000 |
| Gross profit | $1663000 | $1632000 |
| Operating expenses | 1187800 | 1231600 |
| Operating income | $475200 | $400400 |
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 | 475200/2970000 = 16% | 2970000/2700000 = 1.1 | 16*1.1 = 17.6% |
| Mountain Bike Division | 400400/3080000 = 13% | 3080000/2200000 = 1.4 | 13*1.4 = 18.2% |
3. If management desires a minimum acceptable rate of return of 20%, determine the residual income for each division.
| Residual Income | |
| Road Bike Division | $475200-(2700000*20%) = -64800 |
| Mountain Bike Division | $400400-(2200000*20%) = -39600 |
4. On the basis of operating income, the Road bike Division is the more profitable of the two divisions. However, operating income consider the amount of invested assets in each division. On the basis of residual income, the Mountain bike Division is the more profitable of the two divisions.
ekkarill92 answered 2 years agoRelated Solutions
Divisional Performance Analysis and Evaluation The vice president of operations of Free Ride Bike Company is...
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The vice president of operations of Free Ride Bike Company is
evaluating the performance of two divisions organized as investment
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the past year for each division are as follows:
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Mountain Bike Division
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Operating expenses
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Invested assets
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Divisional Performance Analysis and Evaluation The vice president of operations of Free Ride Bike Company is...
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Divisional Performance Analysis and Evaluation The vice president of operations of Free Ride Bike Company is...
Divisional Performance Analysis and Evaluation
The vice president of operations of Free Ride Bike Company is
evaluating the performance of two divisions organized as investment
centers. Invested assets and condensed income statement data for
the past year for each division are as follows:
Road Bike Division
Mountain Bike Division
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$ 5,850,000
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statements for the year ended December...
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