Divisional Performance Analysis and Evaluation The vice president of operations
ID: 2466905 • Letter: D
Question
Divisional Performance Analysis and Evaluation The vice president of operations of Morrison IQ Company is evaluating the performance of two divisions organized as investment centers. Invested assets and condensed income statement data for the past year for each division are as follows: Business Division Consumer Division Sales $ 2,860,000 $ 3,040,000 Cost of goods sold 1,258,000 1,429,000 Operating expenses 1,058,600 1,094,200 Invested assets 2,200,000 1,900,000 Required: Hide 1. Prepare condensed divisional income statements for the year ended December 31, 2014, assuming that there were no service department charges. Morrison IQ Company Divisional Income Statements For the Year Ended December 31, 2014 Business Division Consumer Division Sales $ $ Cost of goods sold Gross profit $ $ Operating expenses Income from operations $ $ 2. Using the DuPont formula for rate of return on investment, determine the profit margin, investment turnover, and rate of return on investment for each division. If required, round your answers to one decimal place. Profit Margin Investment Turnover ROI Business Division % % Consumer Division % % 3. If management desires a minimum acceptable rate of return of 16%, determine the residual income for each division. If required, use the minus sign to indicate a negative income. Residual Income Business Division $ Consumer Division $ 4. On the basis of residual income, the Division is the more profitable of the two divisions. On the basis of income from operations, the Division is the more profitable of the two
Explanation / Answer
1
Morrison IQ Company
Divisional Income Statements For the Year Ended December 31, 2014
Business Division
Consumer Division
Sales
$ 2,860,000
$ 3,040,000
Less: Cost of goods sold Gross
$ 1,258,000
$ 1,429,000
Gross Profit
$ 1,602,000
$ 1,611,000
Less: Operating expenses
$ 1,058,600
$ 1,094,200
Income from operations
$ 543,400
$ 516,800
2
Du Pont Analysis:
Business Division
Consumer Division
Income from operations (A)
$ 543,400.0
$ 516,800.0
Sales (B)
$ 2,860,000
$ 3,040,000
Profit margin = A/B
19.0%
17.0%
Sales (A)
$ 2,860,000
$ 3,040,000
Invested assets (B)
$ 2,200,000
$ 1,900,000
Investment turnover = A/B
1.3
1.6
Income from operations (A)
$ 543,400.0
$ 516,800.0
Invested assets (B)
$ 2,200,000
$ 1,900,000
Rate of return on investment (A/B)
24.7%
27.2%
3
Calculation of the residual income :
Business Division
Consumer Division
Income from operations (A)
$ 543,400.0
$ 516,800.0
Invested assets (B)
$ 2,200,000
$ 1,900,000
Minimum acceptable rate ©
16%
16%
Required Income = (D) = B*C
$ 352,000
$ 304,000
Residual Income =A-D
$ 191,400.0
$ 212,800.0
4
On the basis of residual income, the Consumer Division is the more profitable of the two divisions
On the basis of income from operations, the Business Division is the more profitable of the two
1
Morrison IQ Company
Divisional Income Statements For the Year Ended December 31, 2014
Business Division
Consumer Division
Sales
$ 2,860,000
$ 3,040,000
Less: Cost of goods sold Gross
$ 1,258,000
$ 1,429,000
Gross Profit
$ 1,602,000
$ 1,611,000
Less: Operating expenses
$ 1,058,600
$ 1,094,200
Income from operations
$ 543,400
$ 516,800
2
Du Pont Analysis:
Business Division
Consumer Division
Income from operations (A)
$ 543,400.0
$ 516,800.0
Sales (B)
$ 2,860,000
$ 3,040,000
Profit margin = A/B
19.0%
17.0%
Sales (A)
$ 2,860,000
$ 3,040,000
Invested assets (B)
$ 2,200,000
$ 1,900,000
Investment turnover = A/B
1.3
1.6
Income from operations (A)
$ 543,400.0
$ 516,800.0
Invested assets (B)
$ 2,200,000
$ 1,900,000
Rate of return on investment (A/B)
24.7%
27.2%
3
Calculation of the residual income :
Business Division
Consumer Division
Income from operations (A)
$ 543,400.0
$ 516,800.0
Invested assets (B)
$ 2,200,000
$ 1,900,000
Minimum acceptable rate ©
16%
16%
Required Income = (D) = B*C
$ 352,000
$ 304,000
Residual Income =A-D
$ 191,400.0
$ 212,800.0
4
On the basis of residual income, the Consumer Division is the more profitable of the two divisions
On the basis of income from operations, the Business Division is the more profitable of the two