Question
In: Accounting
The Norse Division of Gridiron Concepts Inc. experienced significant revenue and profit growth from 20Y4 to...
The Norse Division of Gridiron Concepts Inc. experienced significant revenue and profit growth from 20Y4 to 20Y6 as shown in the following divisional income statements:
| 20Y4 | 20Y5 | 20Y6 | |
| Sales | $ 1,470,000 | $ 2,100,000 | $ 2,450,000 |
| Cost of goods sold | 1,064,000 | 1,498,000 | 1,680,000 |
| Gross profit | 406,000 | 602,000 | 770,000 |
| Operating expenses | 185,500 | 224,000 | 231,000 |
|
Income from operations |
$ 220,500 | $ 378,000 | $ 539,000 |
| Invested assets | $735,000 | $1,500,000 | $3,500,000 |
There are no service department charges, and the division operates as an investment center that must maintain a 15% return on invested assets.
Instructions: Determine the profit margin, investment turnover, and return on investment for the Norse Division for 20Y4-20Y6. Based on your calculations, write a paragraph or two to the president of Gridiron Concepts Inc., Knute Holz, evaluating the division's performance.
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Expert Solution
Solution:
| Computation of Ratios - Norse Division | |||
| Particulars | 20Y4 | 20Y5 | 20Y6 |
| Income from operations | $220,500.00 | $378,000.00 | $539,000.00 |
| Sales | $1,470,000.00 | $2,100,000.00 | $2,450,000.00 |
| Profit Margin (Income from operation / Sales) | 15.00% | 18.00% | 22.00% |
| Sales | $1,470,000.00 | $2,100,000.00 | $2,450,000.00 |
| Invested Assets | $735,000.00 | $1,500,000.00 | $3,500,000.00 |
| Investment Turnover ( Sales / Invested Assets) | 2.00 | 1.40 | 0.70 |
| Income from operations | $220,500.00 | $378,000.00 | $539,000.00 |
| Invested Assets | $735,000.00 | $1,500,000.00 | $3,500,000.00 |
| Return on investment ( Income from operation / Invested Assets) | 30.00% | 25.20% | 15.40% |
Paragraph to president of Gridiron Concept Inc.:
Sir we have evaluated performance of Norse division and noticed that Profit margin was increase from 15% to 22% during 20Y4 to 20Y6. However investment turnover was decreased from 2 time to 0.7 times during 20Y4 to 20Y6. Further return on invested is also decreased from 30% to 15.40% during 20Y4 to 20Y6. Still we are able to maintain minimum 15% return on invested assets. from this analysis it seems that division needs improvement in terms of effective utilization of invested assets to grow sales and operating income for the company.
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