Question

The Whole Life Baked Goods 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	$17,600,000	$18,000,000	$9,520,000
Cost of goods sold	10,600,000	12,550,000	6,630,000
Operating expenses	6,120,000	4,730,000	2,318,800
Invested assets	8,000,000	6,000,000	6,800,000

The management of The Whole Life Baked Goods 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 answer 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?

X

Divisional Income Statements

1. Prepare condensed divisional income statements for the three divisions, assuming that there were no service department charges.

The Whole Life Baked Goods 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

X

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 answer 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?

Snack Cake

Cereal

Retail Bakery

Answer 1

		The Whole Life Baked Goods Company
		Divisional Income Statement
		For the Year Ended June 30,20Y7
		Cereal Division	Snack Cake Division	Retail Bakeries Division
1)	Sales	$                                                   17,600,000.00	$                                                        18,000,000.00	$                                                       9,520,000.00
	Cost of goods sold	$                                                   10,600,000.00	$                                                        12,550,000.00	$                                                       6,630,000.00
	Gross Profit	$                                                     7,000,000.00	$                                                          5,450,000.00	$                                                       2,890,000.00
	Operating Expenses	$                                                     6,120,000.00	$                                                          4,730,000.00	$                                                       2,318,800.00
	Income from operation	$                                                         880,000.00	$                                                              720,000.00	$                                                          571,200.00
	Rate of Return on Investment=Profit Margin*Investment Turnover
	Rate of Return on Investment=(Income from Operation/Sales)*(Sales/Invested Assets)
		Cereal Division	Snack Cake Division	Retail Bakeries Division
2)	Income from Operation	$                                                         880,000.00	$                                                              720,000.00	$                                                          571,200.00
	Sales	$                                                   17,600,000.00	$                                                        18,000,000.00	$                                                       9,520,000.00
	Invested Assets	$                                                     8,000,000.00	$                                                          6,000,000.00	$                                                       6,800,000.00
	Rate of Retuen on Investment=	($880000/17600000)*(17600000/8000000)	($720000/18000000)*(18000000/6000000)	($571200/9520000)*(9520000/6800000)
	ROI	11%	12%	8%
3)	Per dollar of invested assets snack cake division is the most profitable of the three divisions.IF rate of return do not change in the future, an expansion of
	snack cake division will return 12% on each dollar of invested assets.Cereal division will return only 11% and Retail Baker division would return 8%.
	If the available funds permit the expansion of one division mangement should consider the expansion of Snak Cake Division.