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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 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

Solutions

Expert Solution

Answer:

1.

E.F. Lynch Company
Divisional Income Statement
For the Year Ended June 30, 20Y8
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
Income from Operations           466,200           613,800           252,000

2.

Division Profit Margin Investment Turnover ROI
Mutual Fund Division 46.2%                  0.3 12.6%
Electronic Brokerage Division 57.9%                  0.3 19.8%
Investment Banking Division 24.5%                  0.5 12.0%

Calculation:

1.

Here we need to prepare condensed divisional income statements for the three divisions, assuming that there were no service department charges.

For that we need to take the Fee revenue of each division and then deduct the Operating expenses provided in the question to get the Income from Operations for each divisions.

2.

Here we need to compute the profit margin, investment turnover, and rate of return on investment for each division using the DuPont formula for rate of return on investment.

First we need to calculate the Profit Margin by dividing the Income from Operations with the Fee revenue.

Mutual Fund Division = 466,200 / 1,010,000 = 46.2%

Electronic Brokerage Division = 613,800 / 1,060,000 = 57.9%

Investment Banking Division = 252,000 / 1,030,000 = 24.5%

Then we need to calculate the Investment turnover by dividjng the Fee revenue with the Invested assets.

Mutual Fund Division = 1,010,000 / 3,700,000 = 0.27

Electronic Brokerage Division = 1,060,000 / 3,100,000 = 0.34

Investment Banking Division = 1,030,000 / 2,100,000 = 0.49

Then we need to calculate the ROI by multiplying the Investment turnover with the profit margin.

Mutual Fund Division = 0.27 x 46.2% = 12.6%

Electronic Brokerage Division = 0.34 x 57.9% = 19.8%

Investment Banking Division = 0.49 x 24.5% = 12.0%

ekkarill92 answered 1 year ago
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