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	$1,010,000	$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:

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

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:

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.

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

Next > < Previous

Related 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 $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...

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...

In divisional income statements prepared for LeFevre Company, the Payroll Department costs are charged back to...

In divisional income statements prepared for LeFevre Company, the Payroll Department costs are charged back to user divisions on the basis of the number of payroll distributions, and the Purchasing Department costs are charged back on the basis of the number of purchase requisitions. The Payroll Department had expenses of $69,056, and the Purchasing Department had expenses of $25,370 for the year. The following annual data for Residential, Commercial, and Government Contract divisions were obtained from corporate records: Residential Commercial...

In divisional income statements prepared for Demopolis Company, the Payroll Department costs are charged back to...

In divisional income statements prepared for Demopolis Company, the Payroll Department costs are charged back to user divisions on the basis of the number of payroll distributions, and the Purchasing Department costs are charged back on the basis of the number of purchase requisitions. The Payroll Department had expenses of $39,960, and the Purchasing Department had expenses of $16,530 for the year. The following annual data for Residential, Commercial, and Government Contract divisions were obtained from corporate records: Residential Commercial...

In divisional income statements prepared for LeFevre Company, the Payroll Department costs are charged back to...

In divisional income statements prepared for LeFevre Company, the Payroll Department costs are charged back to user divisions on the basis of the number of payroll distributions, and the Purchasing Department costs are charged back on the basis of the number of purchase requisitions. The Payroll Department had expenses of $69,984, and the Purchasing Department had expenses of $31,860 for the year. The following annual data for Residential, Commercial, and Government Contract divisions were obtained from corporate records: Residential Commercial...

In divisional income statements prepared for LeFevre Company, the Payroll Department costs are charged back to...

In divisional income statements prepared for LeFevre Company, the Payroll Department costs are charged back to user divisions on the basis of the number of payroll distributions, and the Purchasing Department costs are charged back on the basis of the number of purchase requisitions. The Payroll Department had expenses of $71,312, and the Purchasing Department had expenses of $31,860 for the year. The following annual data for Residential, Commercial, and Government Contract divisions were obtained from corporate records: Residential Commercial...

In divisional income statements prepared for LeFevre Company, the Payroll Department costs are charged back to...

In divisional income statements prepared for LeFevre Company, the Payroll Department costs are charged back to user divisions on the basis of the number of payroll distributions, and the Purchasing Department costs are charged back on the basis of the number of purchase requisitions. The Payroll Department had expenses of $50,016, and the Purchasing Department had expenses of $23,320 for the year. The following annual data for Residential, Commercial, and Government Contract divisions were obtained from corporate records: Residential Commercial...

In divisional income statements prepared for LeFevre Company, the Payroll Department costs are charged back to...

In divisional income statements prepared for LeFevre Company, the Payroll Department costs are charged back to user divisions on the basis of the number of payroll distributions, and the Purchasing Department costs are charged back on the basis of the number of purchase requisitions. The Payroll Department had expenses of $44,208, and the Purchasing Department had expenses of $23,760 for the year. The following annual data for Residential, Commercial, and Government Contract divisions were obtained from corporate records: Residential Commercial...

In divisional income statements prepared for LeFevre Company, the Payroll Department costs are charged back to...

In divisional income statements prepared for LeFevre Company, the Payroll Department costs are charged back to user divisions on the basis of the number of payroll distributions, and the Purchasing Department costs are charged back on the basis of the number of purchase requisitions. The Payroll Department had expenses of $59,984, and the Purchasing Department had expenses of $29,500 for the year. The following annual data for Residential, Commercial, and Government Contract divisions were obtained from corporate records: Residential Commercial...

In divisional income statements prepared for LeFevre Company, the Payroll Department costs are charged back to...

In divisional income statements prepared for LeFevre Company, the Payroll Department costs are charged back to user divisions on the basis of the number of payroll distributions, and the Purchasing Department costs are charged back on the basis of the number of purchase requisitions. The Payroll Department had expenses of $33,056, and the Purchasing Department had expenses of $17,690 for the year. The following annual data for Residential, Commercial, and Government Contract divisions were obtained from corporate records: Residential Commercial...

Subjects