Question

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	$25,000,000	$8,000,000	$9,750,000
Cost of goods sold	16,670,000	5,575,000	6,795,000
Operating expenses	7,330,000	1,945,000	2,272,500
Invested assets	10,000,000	4,000,000	6,500,000

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. Prepare condensed divisional income statements for the three divisions, assuming that there were no service department charges. The Crunchy Granola Company Divisional Income Statements For the Year Ended June 30, 20Y7 1 Cereal Division Snack Cake Division Retail Bakeries Division 2 Sales 3 Cost of goods sold 4 Gross profit 5 Operating expenses 6 Income from operations 2. Using the DuPont formula for return on investment, compute the profit margin, investment turnover, and rate of return on investment for each division. If required, round your final answers to one decimal place. Division Profit Margin Investment Turnover ROI Cereal Snack Cake Retail Bakeries 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)? Retail Bakeries Cereal Snack Cake

Answer 1

Solution 1:

Dviisional Income Statement - Crunchy Granola Company
Particulars	Cereal Division	Snack Cake division	Retail Bakeries Division
Sales	$25,000,000.00	$8,000,000.00	$9,750,000.00
Cost of goods sold	$16,670,000.00	$5,575,000.00	$6,795,000.00
Gross Profit	$8,330,000.00	$2,425,000.00	$2,955,000.00
Operating Expenses	$7,330,000.00	$1,945,000.00	$2,272,500.00
Net Operating Income	$1,000,000.00	$480,000.00	$682,500.00

Solution 2:

Profit Margin - Crunchy Granola Company
Particulars	Choose Numerator		/	Choose denomerator		=	Profit Margin
	Details	Amount		Details	Amount
Cereal Division	Operating Income	$1,000,000.00		Sales	$25,000,000.00		4.00%
Snack Cake division	Operating Income	$480,000.00		Sales	$8,000,000.00		6.00%
Retail Bakeries Division	Operating Income	$682,500.00		Sales	$9,750,000.00		7.00%

Investment Turnover - Crunchy Granola Company
Particulars	Choose Numerator		/	Choose denomerator		=	Investment Turnover
	Details	Amount		Details	Amount
Cereal Division	Sales	$25,000,000.00		Average invested assets	$10,000,000.00		2.50
Snack Cake division	Sales	$8,000,000.00		Average invested assets	$4,000,000.00		2.00
Retail Bakeries Division	Sales	$9,750,000.00		Average invested assets	$6,500,000.00		1.50

Return on Investment
Particulars	Profit Margin	*	Investment Turnover	=	Return on Investment
Cereal Division	4.00%		2.50		10.00%
Snack Cake division	6.00%		2.00		12.00%
Retail Bakeries Division	7.00%		1.50		10.50%

Solution 3:

As ROI for snack cake division is highest therefore available funds should be utilized for expansion of snack cake division.