Divisional Performance Analysis and Evaluation The vice president of operations
ID: 2572824 • 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:
Required:
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.
3. If management desires a minimum acceptable rate of return of 18%, determine the residual income for each division. If required, use the minus sign to indicate a negative income.
4. On the basis of residual income, the SelectBusinessConsumerCorrect 9 of Item 2 Division is the more profitable of the two divisions. On the basis of income from operations, the SelectBusinessConsumerCorrect 10 of Item 2 Division is the more profitable of the two divisions.
Business Division Consumer Division Sales $ 3,410,000 $ 3,640,000 Cost of goods sold 1,500,000 1,711,000 Operating expenses 1,296,200 1,201,000 Invested assets 3,100,000 2,600,000Explanation / Answer
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 $3,410,000 $3,640,000 Cost of goods sold $1,500,000 $1,711,000 Gross Profit $1,910,000 $1,929,000 Operating expenses $1,296,200 $1,201,000 Income from operations $613,800 $728,000 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. Business Division Consumer Division Profit margin = Income from operations/ Sales 18.00% 20.00% Investment Turnover = Sales/ Invested Assets 1.10 1.40 ROI = profit margin x Investment turnover 19.80% 28.00% Profit Margin Investment Turnover ROI Business Division 18.00% 1.10 19.80% Consumer Division 20.00% 1.40 28.00% 3. If management desires a minimum acceptable rate of return of 18%, determine the residual income for each division. If required, use the minus sign to indicate a negative income. Residual Income = (Sales - ( Invested assets x 18%)) Business Division $2,852,000 Consumer Division $3,172,000 4. On the basis of residual income, Consumer Division is the more profitable of the two divisions. On the basis of income from operations, the Consumer Division is the more profitable of the two divisions.