Chapter 10, Problem 5PB

Divisional performance analysis and evaluation

The vice president of operations of Free Ride Bike Company 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:

Instructions

1. 1. Prepare condensed divisional income statements for the year ended December 31, 20Y7, assuming that there were no support department allocations.
2. 2. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for each division. Round percentages and the investment turnover to one decimal place.
3. 3. If management’s minimum acceptable return on investment is 10%, determine the residual income for each division.
4. 4. Discuss the evaluation of the two divisions, using the performance measures determined in parts (1), (2), and (3).