Divisional Performance Analysis and Evaluation The vice president of operations of Free Ride Bike Company is...

Divisional Performance Analysis and Evaluation

	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 1 year ago

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