The vice president of operations of14 computers inc. is evaluating the performan
ID: 2433951 • Letter: T
Question
The vice president of operations of14 computers inc. is evaluating the performance of two divisionsorganized as investment centers. Invested assets andcondensed income statement data for the past year for each divisionare as follows:
PersonalComputingDivision Business Computing Division
Sales $800,000 $1,200,000
COGS 460,000 780,000
OperatingExpenses 180,000 156,000
Investedassets 500,000 2,000,000
INSTRUCTIONS
1. Prepare condensed divisionalincome statements for the year ended December 31, 2008,
assumingthat there were no service department charges.
2. Using DuPont formula for rate ofreturn on investment, determine the profit margin, investmentturnover, and rate of return on investment for eachdivision.
3. If management’s minimumacceptable rate of return is 15% determine the residual income foreach division.
Explanation / Answer
x.Hbsp; Divisional Income Statement Division Total Personal Computing Division Business Computing Division Net Income 2,000,000 800,000 1,200,000 COGS 1,240,000 460,000 780,000 Gross Profit 760,000 340,000 420,000 Operating Expenses 336,000 180,000 156,000 Net Income 424,000 160,000 264,000 Return on Investment 160,000/500,000 = 32% 264,000/2,000,000 = 13.2% Profit Margin 160,000/800,000 = 20% 264,000/1,200,000 = 22% Investment Turnover 800,000/500,000 = 1.6 times 1,200,000/2,000,000 = 0.6 times Personal Computing Division BusinessComputing Division Net Income 160,000 264,000 Less: Assumed Return 500,000*15% 75,000 2,000,000*15% 300,000
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