PR 23-3B Divisional income statements and rate of return on investment analysis

Question

PR 23-3B Divisional income statements and rate of return on investment analysis oBJ. E.F. Lynch Company is a diversified investment company with three operating divisions organized as invcstment centers. Condensed data taken from thc records of the threc divisions for the year encled June 30, 2016, are as follows: 2. Mutual Fund Division, ROL 22.4% Mutual Fund Brokerago 2980800 3,360,000Divlslon 3,091,200 1,120,000 $4560,000 Fee revenue Operating expenses Invested assets 3,739,20 3,800,000 5,175,000 The managmtof F.F. ynch Company is evaluating each clivision as a basis for plan- ning a futuure expansion of operations. Instructions 1. Prepare condsed divisional income statements for the three divisions, assuming that there were no scrvice department charges investment turnover, and rate of return on investment for each division which of the divisions would you recommend for expansion, based on parts (1) and 2. Using the DuPontomula for rate of return on investment, compute the profit margin, 3.If available funds permit the expansion of operations of only one division, (2) Explain.

Explanation / Answer

1. Calculation of condensed divisional income statement -

2. Du-pont formula for rate of return = net income / Net revenues * Net sales / Total Assets

=

3. based on part 1 choice would be Mutual fund division as it has higher profit on revenues.

and after seeing the part 2 choice would be Electronic brokerage division as it has higher rate of return.

my choice would be electronic brokerage as it has less fund block and higher return compare to other option.

Please note all values are in $.

In case of any further clarification required please comment.

particulars Mutual fund division Electronic brokerage division Investment banking division Fee Revenue 4140000 3360000 4560000 less operating expense 2980800 3091200 3739200 net income 1159200 268800 820800

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