The vice president of operations of Recycling Industries is evaluating the performance of two divisions organized as investment centers. Invested assets and condensed income statement data for the past year for each division are as follows:CategoryBusiness DivisionConsumer DivisionSales$42,750,000$55,000,000Cost of goods sold23,000,00031,000,000Operating expenses11,200,00014,500,000Invested assets35,250,00067,000,000 Prepare condensed divisional income statements for the year ended December 31, 2020, assuming that there were no service department charges. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for each division. (Round percentages to one decimal place and the investment turnover to two decimal places.)If management desires a minimum acceptable return on investment of 10%, determine the residual income for each division. Discuss the evaluation of the two divisions compared to each other, using the performance measures determined in parts (a), (b), and (c).

SOLUTION :- 1. CONDENSED DIVISIONAL INCOME STATEMENT PARTICULARS BUSINESS DIVISION CONSUMER DIVISION Sales $42,750,000 $55,000,000 LESS:-Cost of goods sold ($23,000,000) ($31,000,000) LESS:-Operating expenses ($11,200,000) ($14,500,000) Divisional Operating Income $ 8,550,000 $ 9,500,00O 2. Computation of profit margin, investment turnover, and Return on Investment(ROI) under Dupoint model: A B C PARTICULARS BUSINESS DIVISION CONSUMER DIVISION 1 Sales $ 42,750,000 $ 55,000,000 2 Operating income $ 8,550,000 $ 9,500,000 3 Invested assets $ 35,250,000 $ 67,000,000 4 Profit Margin 20.00% 17.27% 5 Investment Turnover 121.28% 82.09% 6 Return On Investment 24.26% 14.18% Working:- A B C 1 PARTICULARS BUSINESS DIVISION CONSUMER DIVISION 2 Sales 42,750,000 55,000,000 3 Operating income 8,550,000 9,500,000 4 Invested assets 35,250,000 67,000,000 5 Profit margin =B3/B2 =C3/C2 6 Investment turnover =B2/B4 =C2/C4 7 Return on investment =B5*B6 =C5*C63. Computation of residual Income under both divisions: A B C 1 PARTICULARS BUSINESS DIVISION CONSUMER DIVISION 2 Sales $ 42,750,000 $ 55,000,000 3 Invested assets $ 35,250,000 $ 67,000,000 4 Operating income $ 8,550,000 $ 9,500,000 5 Return on investment @10% $ 3,525,000 $ 6,700,000 6 Residual income $ 5,025,000 $ 2,800,000 Working:- A B C 1 PARTICULARS BUSINESS DIVISION CONSUMER DIVISION 2 Sales $ 42,750,000 $ 55,000,000 3 Invested assets $ 35,250,000 $ 67,000,000 4 Operating income $ 8,550,000 $ 9,500,000 5 Return on investment @10% =B3*10% =C3*10% 6 Residual income =B4-B5 =C4-C5 4. The consumer division has higher operating income ,profit margin, residual income and also has more assets invested as compare with business division. so earnings from Consumer Division can be invested in Business Division to improve overall profitability of the company. Hence, consumer division is better

Answered: The vice president of operations of…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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The vice president of operations of Recycling Industries is evaluating the performance of two divisions organized as investment centers. Invested assets and condensed income statement data for the past year for each division are as follows:

Category	Business Division	Consumer Division
Sales	$42,750,000	$55,000,000
Cost of goods sold	23,000,000	31,000,000
Operating expenses	11,200,000	14,500,000
Invested assets	35,250,000	67,000,000

Prepare condensed divisional income statements for the year ended December 31, 2020, assuming that there were no service department charges.
Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for each division. (Round percentages to one decimal place and the investment turnover to two decimal places.)
If management desires a minimum acceptable return on investment of 10%, determine the residual income for each division.
Discuss the evaluation of the two divisions compared to each other, using the performance measures determined in parts (a), (b), and (c).

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