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

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 1 year ago

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