Divisional Performance Analysis and Evaluation The vice president of operations
ID: 2557428 • 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 1. Prepare condensed divisional income statements for the year ended December 31, 2016, assuming that there were no service department charges Business Division 3,720,000 1,637,000 1,487,800 3,100,000 Consumer Division $3,920,000 1,842,000 1,294,000 2,800,000 Morrison IQ Company Divisional Income Statements For the Year Ended December 31, 2016 Bu siness Division Consumer Division Sales Cost of goods sold Gross proft Operating expenses Income from operationsExplanation / Answer
Req 1: Business Commercial Sales revenue 3720000 3920000 Less: Cost of goods sold 1637000 1842000 Gross margin 2083000 2078000 Less: operating expense 1487800 1294000 Income from operations 595200 784000 Req 2: Profit margin * Investment turnover = ROI Business Division 16% * 1.2 19.20% Commercial Division 20% * 1.4 28% Note: Profit margin: Net Income / Sales revenue *100 Investment turnover: Sales / Investing assets ROI = profit mamrgin * Investment turnover Req 3: Business Commercial Investing assets 3,100,000 2,800,000 Min rate of return 17% 17% target Income 527000 476000 Actual net income 595200 784000 Residual income 68200 308000 Residual Income Business division 68,200 Commercial 308,000 Req 4: On the basis of residual income, the Commercial division is more profitable of two divisions. On the basis of income from operations, The commercial division is more profitable of two divisions.