Divisional Performance Analysis and Evaluation The vice president of operations
ID: 2582641 • 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 15%, 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.
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Problem 24-5 (Algorithmic)
Business Division Consumer Division Sales $ 5,160,000 $ 5,400,000 Cost of goods sold 2,270,000 2,538,000 Operating expenses 1,909,600 1,728,000 Invested assets 4,300,000 3,600,000Explanation / Answer
1. Divisional Income Statement Business Division Consumer Division A Sales 51,60,000.00 54,00,000.00 B Cost of Goods Sold 22,70,000.00 25,38,000.00 A-B=C Gross Profit 28,90,000.00 28,62,000.00 D Operating Exp 19,09,600.00 17,28,000.00 C-D=E Income From Operations 9,80,400.00 11,34,000.00 2. DUPONT Formula Invested Assets 4300000 3600000 Profit Margin (%) Investment Turnover ROI % Income From operations/Sales*100 Sales/Invested Assets Profit Margin*Investmetn Turnover Business Division 19 1.20 22.80 Consumer Division 21 1.50 31.50 3. Residual Income Invested Asset (A) Required Return Rate (B) Required Return (A*B=C) Actual Operating Income D Residual Income (D-C) Business Division 4300000 15% 6,45,000.00 9,80,400.00 3,35,400.00 Consumer Division 3600000 15% 5,40,000.00 11,34,000.00 5,94,000.00 4. Dicision Based on Residual Income Should consider Consumer Division Based on Income From operations Should consider Consumer Division