Divisional Income Statements and Return on Investment Analysis E.F. Lynch Compan
ID: 2658231 • 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:
The management of E.F. Lynch Company is evaluating each division as a basis for planning a future expansion of operations.
Required:
1. Prepare condensed divisional income statements for the three divisions, assuming that there were no service department charges.
2. Using the DuPont formula for rate of return on investment, compute the profit margin, investment turnover, and rate of return on investment for each division. Round your answers to one decimal place.
3. When faced with limited funds for expansion, management should consider an expansion of the (electronic brokeage or investment banking or mutual fund??) Division first.
Mutual Fund Division
Electronic Brokerage Division
Investment Banking Division Fee revenue $1,420,000 $1,470,000 $1,430,000 Operating expenses 764,800 696,000 1,082,000 Invested assets 5,200,000 4,300,000 2,900,000
Explanation / Answer
1 E.F Lynch Company Divisional Income statements For the Year Ended June 30, 20Y8 Mutual Fund Division Electronic Brokerage Division Investment Banking Division Fee revenue $1,420,000 $1,470,000 $1,430,000 Operating Expenses 764800 696000 1082000 Income from operations $655,200 $774,000 $348,000 2 Division Profit Margin = Income from operations/Fee revenue Investment Turnover - Fee Revenue/Invested assets ROI (Profit Margin*Investment turnover) Mutual Fund Division 46.14% 27.31% 12.60% Electronic Brokerage Division 52.65% 34.19% 18.00% Investment Banking Division 24.34% 49.31% 12.00% 3 If the company is faced with limited funds for expansion than the company should invest first in Elctronic Brokerage Division due to higher ROI