PR 23-5B Divisional performance analysis and evaluation Road Bike The vice presi

Question

PR 23-5B Divisional performance analysis and evaluation Road Bike The vice president of operations of Free ROI, 12.0% two di Obj. 4 Ride Bike Company is evaluating the performance of ment visions organized as investment centers. Invested assets and condensed income state data for the past year for each division are as follows: ounta $1,728,000 1,380,000 175,200 1,440,000 $1,760,000 1,400,000 236,800 800,000 XCEL TEMPLATE Cost of goods sold Operating expenses Invested assets Instructions 1. Prepare condensed divisional income statements for the year ended December 31, 20Y7 assuming that there were no service department charges. 2. Using the DuPont formula for return on investment, determine the profit margin, investment 3. If management's minimum, acceptable return on investment is 10%, determine the residual 4.Discuss the evaluation of the two divisions, using the performance measures de- turnover, and return on investment for each division. (Round percentages and the invest- ment turnover to one decimal place.) income for each division. termined in parts (1), (2), and (3).

Explanation / Answer

1)

2) Return on investment using Dupont = profit margin * Asset turnover

= (net profit / sales) * (sales / total assets)

ROI for both divisions is calculated as follows:

3) Residual income = excess of profits over the minimum required return.

4) Mountain Bike division is performing as compared to the Road bike division.This is because it has a higher return on investment and a higher residual income. Even though the net profits for Road division is higher but the profit margins for Mountain division is higher, hence they are better performers.

Free Ride Bike Company Divisional Income Statement For the year ended 31st December, 2017 Particulars Road Bike division Mountain Bike division Sales $17,28,000 $17,60,000 Less: cost of goods sold $13,80,000 $14,00,000 Gross profit $3,48,000 $3,60,000 Less: operating expenses $1,75,200 $2,36,800 Net Income $1,72,800 $1,23,200

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