In: Accounting
The Crunchy Granola Company is a diversified food company that specializes in all natural foods. The company has three operating divisions organized as investment centers. Condensed data taken from the records of the three divisions for the year ended June 30, 20Y7, are as follows:
Cereal Division | Snack Cake Division | Retail Bakeries Division | |
---|---|---|---|
Sales | $27,100,000 | $8,040,000 | $9,750,000 |
Cost of goods sold | 16,690,000 | 5,575,000 | 6,710,000 |
Operating expenses | 8,784,000 | 1,741,400 | 2,260,000 |
Invested assets | 9,033,333 | 2,010,000 | 3,900,000 |
The management of The Crunchy Granola 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. |
2. | Using the DuPont formula for return on investment, compute the profit margin, investment turnover, and return on investment for each division. If required, round your final answers to one decimal place. |
3. | If available funds permit the expansion of operations of only one division, which of the divisions would you recommend for expansion, based on parts (1) and (2)? |
1.
The Crunchy Granola Company | |||
Condensed Divisional Income Statements | |||
Cereal Division | Snack Cake Division | Retail Bakeries Division | |
Sales $ | 27100000 | 8040000 | 9750000 |
Cost of goods sold | 16690000 | 5575000 | 6710000 |
Gross profit | 10410000 | 2465000 | 3040000 |
Operating expenses | 8784000 | 1741400 | 2260000 |
Income from operations | 1626000 | 723600 | 780000 |
2.
Division | Profit Margin | Investment Turnover | ROI |
Cereal Division | 6.0% | 3.0 | 18.0% |
Snack Cake Division | 9.0% | 4.0 | 36.0% |
Retail Bakeries Division | 8.0% | 2.5 | 20.0% |
Working:
DuPont formula: Rate of return on investment = Profit margin x Investment turnover
Profit margin = Net income / Sales
Investment turnover = Sales / Total assets
Cereal Division | Snack Cake Division | Retail Bakeries Division | |
Net income | 1626000 | 723600 | 780000 |
Sales | 27100000 | 8040000 | 9750000 |
Profit margin | 6.0% | 9.0% | 8.0% |
Sales | 27100000 | 8040000 | 9750000 |
Invested assets | 9033333 | 2010000 | 3900000 |
Investment turnover | 3.0 | 4.0 | 2.5 |
Rate of return on investment | 18.0% | 36.0% | 20.0% |
3. The division recommended for expansion would be the Snack Cake Division since it generates the highest rate of return on investment of 36% as compared to the other two divisions.