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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Communication

 The Norsk Division of Gridiron Concepts Inc. has been experiencing revenue and profit growth during the years 20Y6-20Y8. The divisional income statements follow:

Gridiron Concepts Inc

Divisional Income Statements, Norsk Division

For the Years Ended December 31,20Y6-20Y8

  20Y6 20Y7 20Y8
Sales $1,470,000 $2,100,000 $2,450,000
Cost of goods sold 1,064,000 1,498,000 1,680,000
Gross profit $406,000 $602,000 $770,000
Operating expenses 185,500 224,000 231,000
Income from operations $220.500 $378,000 $539,000
Invested assets $735,000 $1,500,000 $3,500,000

 There are no service department charges, and the division operates as an investment center that must maintain a 15% return on invested assets.

 Determine the profit margins, investment turnover, and return on investment for the Norse Division for 20Y6-20Y8. Based on your calculations, write a brief memo to the president of Gridiron Concepts Inc., Tom Yang, evaluating the division’s performance.

To determine

Profit margin: This ratio gauges the operating profitability by quantifying the amount of income earned from business operations from the sales generated.

Formula of profit margin:

Profit margin=Income from operationsSales

Investment turnover: This ratio gauges the operating efficiency by quantifying the amount of sales generated from the assets invested.

Formula of investment turnover:

Investment turnover=SalesInvested assets

Return on investment (ROI): This financial ratio evaluates how efficiently the assets are used in earning income from operations. So, ROI is a tool used to measure and compare the performance of a units or divisions or a companies.

Formula of ROI according to Dupont formula:

Return on investment = Profit margin × Investment turnover=Income from operationsSales×SalesInvested assets=Income from operationsInvested assets

To compute: Profit margin, investment turnover, and return on investment (ROI), and draft a memo to the president explaining the performance of N Division

Explanation

Prepare a memo to the controller.

MEMO

Date:    January 22, 2018

To:    TM, President, Incorporation GC

From:    Ms J

Subject:  Evaluation of N Division’s performance

By observing the operating results of N Division, the gross profit, income from operations, and revenues, it can be concluded that the performance of the division has increased considerably from 20Y6 to 20Y8. To know the actual performance, the profit margin, investment turnover, and income from operations are computed as follows:

For 20Y6:

Return on investment =          Profit margin         ×    Investment turnover=Income from operationsSales×SalesInvested assets=$220,500$1,470,000×$1,470,000$735,00015% ×2.0= 30%

For 20Y7:

Return on investment =          Profit margin         ×    Investment turnover=Income from operationsSales×SalesInvested assets=$378,000$2,100,000×

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