Divisional Performance Analysis and EvaluationThe 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: Road Bike DivisionMountain Bike DivisionSales$1,728,000 $1,760,000 Cost of goods sold1,380,000 1,400,000 Operating expenses175,200 236,800 Invested assets1,440,000 800,000  Required:1.  Prepare condensed divisional income statements for the year ended December 31, 20Y7, assuming that there were no support department allocations.Free Ride Bike CompanyDivisional Income StatementsFor the Year Ended December 31, 20Y7 Road Bike DivisionMountain Bike DivisionSales$$Cost of goods sold  Gross profit$$Operating expenses  Operating income$$2.  Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and rate of return on investment for each division. If required, round your answers to one decimal place.DivisionProfit MarginInvestment TurnoverROIRoad Bike Division %  %Mountain Bike Division %  %3.  If management's minimum acceptable return on investment is 10%, determine the residual income for each division. Residual IncomeRoad Bike Division$Mountain Bike Division$4.  On the basis of operating income, the   Division is the more profitable of the two divisions. However, operating income   consider the amount of invested assets in each division. On the basis of residual income, the   Division is the more profitable of the two divisions.

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Asked Nov 25, 2019
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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:

  Road Bike Division Mountain Bike Division
Sales $1,728,000   $1,760,000  
Cost of goods sold 1,380,000   1,400,000  
Operating expenses 175,200   236,800  
Invested assets 1,440,000   800,000  

 

Required:

1.  Prepare condensed divisional income statements for the year ended December 31, 20Y7, assuming that there were no support department allocations.

Free Ride Bike Company
Divisional Income Statements
For the Year Ended December 31, 20Y7
  Road Bike Division Mountain Bike Division
Sales $ $
Cost of goods sold    
Gross profit $ $
Operating expenses    
Operating income $ $

2.  Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and rate of return on investment for each division. If required, round your answers to one decimal place.

Division Profit Margin Investment Turnover ROI
Road Bike Division  %    %
Mountain Bike Division  %    %

3.  If management's minimum acceptable return on investment is 10%, determine the residual income for each division.

  Residual Income
Road Bike Division $
Mountain Bike Division $

4.  On the basis of operating income, the   Division is the more profitable of the two divisions. However, operating income   consider the amount of invested assets in each division. On the basis of residual income, the   Division is the more profitable of the two divisions.

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Expert Answer

Step 1

1.

Prepare condensed divisional income statements for the year ended December 31, 20Y7, assuming that there were no support department allocations.

 

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Particualrs Road Bike Mountain Bike $1,728,000 -$1,380,000 -$175,200 $1,760,000 -$1,400,000 -$236,800 $123,200 sales Less:cost of goods sold Operating expense $172,800 Net income

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Step 2

2.

Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and rate of return on investment for each division.

 

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Road bike Mountain Bike Particualrs Formula $17,2800/$1,728,000 Net income /sales $123,200/$1,760,000 .07 or 7% Profit margin = .10 or 10 % $1,728,000/$1,440,000 $1,760,000/$800,000 sales/Asset Investment turnover 1.2 2.2 Profit margin Investment turnover 10 % * 1.2 7%*2.2 12% 15% ROI

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Step 3

3.

If management's minimum acceptable return on investment is 10%, determin...

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Particulars Road Bike Mountain Bike Net income (A) $172,800 $123,200 10% 10% $800,000 $43,200 Hurdle rate (B) Invested assets (C) Residual income ( D A - (B C) $1,440,000 $28,800

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