Divisional Income Statements and Return on Investment Analysis E.F. Lynch Compan
ID: 2528900 • Letter: D
Question
Divisional Income Statements and Return on Investment Analysis E.F. Lynch Company is a diversified investment company with three operating divisions organized as investment centers. Condensed data taken from the records of the three divisions for the year ended June 30, 20Y8 are as follows: Electronic Brokerage Division Investment Banking Division Mutual Fund Division Fee revenue Operating expenses Invested assets The management of E.F. Lynch Company is evaluating each division as a basis for planning a future expansion of operations. Required $2,480,000 1,333,400 9,100,000 $2,600,000 1,232,000 7,600,000 $2,460,000 1,860,000 5,000,000 1. Prepare condensed divisional income statements for the three divisions, assuming that there were no service department charges. E.F. Lynch Company Divisional Income Statements For the Year Ended June 30, 20Y8 Mutual Fund Divislon Electronc Brokerage Divislon Investment Banking Divislon Fee revenue Operating expenses Inccme from operations 2. Using the DuPont formula for rate of returm on investment, compute the profit margin, investment turnover, and rate of return on investment for each division. Round your answers to one decimal place. Division Mutual Fund Division Profit Margin Investment Turnover ROI Electronic Brokerage Divisiorn Investment Banking Division 3. When faced with limited funds for expansion, management should consider an expansion of the 06 Division first.Explanation / Answer
1. Divisional Income Statement
2. Profit margin, investment turnover and rate of return on investment for each division
3. Management should consider an expansion of the Electronic Brokerage Division because it offers maximum return among all three divisions.
Explanation :
Profit Margin = Operating Income / Revenue from operations
Mutual fund division = $1,146,600 / $2,480,000 = 46.23%
Electronic Brokerage division = $1,368,000 / $2,600,000 = 52.62%
Investment Banking Division = $600,000 / $2,460,000 = 24.39%
Investment Turnover = Revenue from operations / Total Investment
Mutual fund division = $2,480,000 / $9,100,000 = 0.2725
Electronic Brokerage division = $2,600,000 / $7,600,000 = 0.3421
Investment Banking Division = $2,460,000 / $5,000,000 = 0.492
ROI = Operating Profit / Total Investment
Mutual fund division = $1,146,600 / $9,100,000 = 12.6%
Electronic Brokerage division = $1,368,000 / $7,600,000 = 18%
Investment Banking Division = $600,000 / $5,000,000 = 12%
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Mutual Fund Division Electronic Brokerage Division Investment Banking Division Fee Revenue $2,480,000 $2,600,000 $2,460,000 Operating Expenses $1,333,400 $1,232,000 $1,860,000 Income from Operations $1,146,600 $1,368,000 $600,000