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	$8,120,000	$9,750,000
Cost of goods sold	16,620,000	5,555,000	6,720,000
Operating expenses	7,130,000	1,915,400	2,542,500
Invested assets	7,142,857	2,030,000	3,250,000

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)?

Divisional Income Statements

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

Final Questions

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.

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)?

Snack Cake

Retail Bakeries

Cereal

Answer 1

(1) Condensed divisional income statements

	Cereal Division	Snack Cake Division	Retail Bakeries Division
Sales	25,000,000	8,120,000	9,750,000
Cost of goods sold	16,620,000	5,555,000	6,720,000
Gross profit	8,380,000	2,565,000	3,030,000
Operating expenses	7,130,000	1,915,400	2,542,500
Income from operations	1,250,000	649,600	487,500

(2) Profit margin, investment turnover, and return on investment for each division

Division	Profit Margin	Investment Turnover	ROI
Cereal	5%	3.5	17.5%
Snack Cake	8%	4	32%
Retail Bakeries	5%	3	15%

Profit Margin = [ Net Operating Income / Sales ] x 100

Cereal                   = [ $12,50,000 / 2,50,00,000 ] x 100 = 5%         

Snack Cake           = [ $649,600 / 81,20,000 ] x 100 = 8%     

Retail Bakeries     = [ $487,500 / 97,50,000 ] x 100 = 5%

Investment Turnover = Sales / Invested Assets

Cereal                   = $2,50,00,000 / 71,42,857 = 3.5

Snack Cake           = $81,20,000 / 20,30,000 = 4

Retail Bakeries     = $97,50,000 / 32,50,000 = 3

ROI = Profit Margin x Investment Turnover

(3)We would recommend Retail Bakeries for expansion, since the Return on Investment (ROI) is low in the case of Retail Bakeries while comparing with the other two investment options. It has a ROI of 15% while Cereal Division and Snack Cake division has a ROI of 17.5% and 32% ROI respectively