Divisional Performance Analysis and Evaluation The vice president of operations
ID: 2519554 • 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 Sales Cost of goods sold Operating expenses Invested assets Required: Business Division 4,920,000 2,165,000 1,869,400 4,100,000 Consumer Division 5,250,000 2,468,000 1,679,500 3,500,000 1. Prepare condensed divisional income statements for the year ended December 31, 2016, assuming that there were no service department charges. Morrison IQ Company Divisional Income Statements For the Year Ended December 31, 2016 Business Division Consumer Division 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 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 divisions.Explanation / Answer
Division income statment :
Calculate following :
C) Residual income :
Bussiness division = 885600-(4100000*16%) = 229600
Consumer division = 1102500-(3500000*16%) = 542500
d) On the basis of residual income the consumer division is the more profitable of the two divisions. On the basis of income from operation, the consumer division is the more profitable of the two division.
Business division Consumer division Sales 4920000 5250000 Cost of goods sold -2165000 -2468000 Gross profit 2755000 2782000 Operating expense -1869400 -1679500 Income from operation 885600 1102500