Sunshine Food Company is a diversified food company that specializes in all natu
ID: 2562882 • Letter: S
Question
Sunshine Food Company is a diversified food company that specializes in all natural foods. The company has three operating divisions organized as A decentralized unit in which the manager has the responsibility and authority to make decisions that affect not only costs and revenues but also the fixed assets available to the center.investment centers. Condensed data taken from the records of the three divisions for the year ended June 30, 2016, are as follows:
The management of Sunshine Food 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 The costs of services provided by an internal service department and transferred to a responsibility center.service department charges.
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2. Using the An expanded expression of return on investment determined by multiplying the profit margin by the investment turnover.DuPont formula for A measure of managerial efficiency in the use of investments in assets, computed as income from operations divided by invested assets.rate of return on investment, compute the A component of the rate of return on investment, computed as the ratio of income from operations to sales.profit margin, A component of the rate of return on investment, computed as the ratio of sales to invested assets.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
Cereal
Snack Cake
Retail Bakeries
Division first.
Cereal
Division
Snack Cake
Division Retail
Bakeries
Division Sales $2,240,000 $2,340,000 $2,160,000 Cost of goods sold 1,370,000 1,450,000 1,270,000 Operating expenses 377,200 328,400 544,400 Invested assets 3,200,000 2,600,000 1,800,000
Explanation / Answer
Sunshine Food Company
Sunshine Food Company
Divisional Income Statements
For the year ended June 30, 2016
Cereal Division
Snack Cake Division
Retail Bakeries Division
Sales
$2,240,000
$2,340,000
$2,160,000
Cost of goods sold
$1,370,000
$1,450,000
$1,270,000
Gross Profit
$870,000
$890,000
$890,000
Operating Expenses
$377,200
$328,400
$544,400
Income from Operations
$492,800
$561,600
$345,600
Profit Margin
Investment Turnover
ROI
Cereal Division
22%
70%
15.40%
Snack Cake Division
24%
90%
21.60%
Retail Bakeries Division
16%
120%
19.20%
Profit margin is calculated as follows,
Income from operations/sales
For instance, Profit margin for Cereals division = 492,800/2,240,000 = 22%
Income from operations/invested assets
Cereals division = 492,800/3,200,000 = 15.4%
Snacks Cake Div = 561,600/2,600,000 = 21.6%
Bakeries Div = 345,600/1,800,000 = 19.2%
Ratio of sales to invested assets
Cereals Div = 2,240,000/3,200,000 = 70%
Snacks cake Div = 2,340,000/2,600,000 =90%
Bakeries Div = 2,160,000/1,800,000 =120%
ROI = Profit margin x investment turnover
Cereals Div = 0.22 x 0.7 = 15.4%
Snacks Cake Div = 0.24 x 0.9 = 21.6%
Bakeries Div = 0.16 x 1.2 = 19.2%
Sunshine Food Company
Divisional Income Statements
For the year ended June 30, 2016
Cereal Division
Snack Cake Division
Retail Bakeries Division
Sales
$2,240,000
$2,340,000
$2,160,000
Cost of goods sold
$1,370,000
$1,450,000
$1,270,000
Gross Profit
$870,000
$890,000
$890,000
Operating Expenses
$377,200
$328,400
$544,400
Income from Operations
$492,800
$561,600
$345,600
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