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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
Sales $ 2,860,000 $ 2,990,000
Cost of goods sold 1,258,000 1,405,000
Operating expenses 1,115,800 1,016,900
Invested assets 2,600,000 2,300,000

Required:

1. Prepare condensed divisional income statements for the year ended December 31, 20Y7, assuming that there were no service department charges.

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
Income from operations $ $

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 18%, determine the residual income for each division. If required, use the minus sign to indicate a negative income.

Residual Income
Road Bike Division $
Mountain Bike Division $

4. On the basis of income from operations, the (road or mountain bike) Division is the more profitable of the two divisions. However, income from operations (does or does not) consider the amount of invested assets in each division. On the basis of residual income, the (road or mountain bike) Division is the more profitable of the two divisions.

Solutions

Expert Solution

Req 1.
Divisional Income Statement
Road Bike Mountain Bike
Sales 2860000 2990000
Cost of Goods sold 1258000 1405000
Gross profit 1602000 1585000
Operating expense 1115800 1016900
Income from operations 486200 568100
Req 2.
Profit Investment ROI
Margin Turnover
Road Bike 17% 1.1 18.70%
Mountain Bike 19% 1.3 24.70%
Note: Profit margin: Income from Operations/ Sales *100
Investment turnover = Sales / Invested assets
ROI = Profit margin * Investment Turnover
Req 3.
Road Bike Mouuntain Bike
Sales 2860000 2990000
Target rate 18% 18%
Target Income 514800 538200
Actual income from operations 486200 568100
Residual income -28600 29900
(Actual income - Target income)
Req 4.
On the basis of income, Mountain bike division is more profitable.
However, income from operations does not consider the amount of invested assets.
On the basis of residual income, Mountain bike division is more profitable of two divisions.

ekkarill92 answered 2 years ago
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