Question

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:
Business Division Consumer Division
Sales $42,800,000 $56,000,000
Cost of goods sold 23,500,000 30,500,000
Operating expenses 11,424,800 14,300,000
Invested assets 34,240,000 70,000,000
Required:
1. Prepare condensed divisional income statements for the year ended December 31, 20Y8, assuming that there were no service department charges.
2. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for each division. If required, round your answers to two decimal places.
3. If management desires a minimum acceptable return on investment of 10%, determine the residual income for each division.
4. Discuss the evaluation of the two divisions, using the performance measures previously determined in parts (1), (2), and (3).
Divisional Income Statements

1. Prepare condensed divisional income statements for the year ended December 31, 20Y8, assuming that there were no service department charges.

Recycling Industries

Divisional Income Statements

For the Year Ended December 31, 20Y8

1

Business Division

Consumer Division

2

Sales

3

Cost of goods sold

4

Gross profit

5

Operating expenses

6

Income from operations

Final Questions

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

Profit Margin Investment Turnover ROI
Business Division
Consumer Division
3. If management desires a minimum acceptable return of investment 10%, determine the residual income for each division.

Residual Income
Business Division $
Consumer Division $
4. Discuss the evaluation of the two divisions, using the performance measures previously determined in parts (1), (2), and (3).

On the basis of income from operations, the Division is more profitable. However, income from operations does not consider the amount of invested assets in each division. On the basis of the rate of return on investment, the Division is more profitable. Even though the Division has a higher profit margin, the Division has a higher investment turnover, which generates the higher rate of return on investment. On the basis of residual income, the Division is the more profitable of the two divisions.

Answer 1

Answer:

   Recycling Inductries

1.  Condensed Divisional Income Statement for the year ended Dec 31 20Y8

                                                    Business Division                Consumer Division

                                                                 $                                         $

sales                                                  42,800,000                      56,000,000

Cost of Goods Sold                         (23,500,000)                     (30,500,000)

Gross Profit                                       19,300,000                        25,500,000

Operating expenses                         (11,424,800)                       (14,300,000)

Net Income                                         7,875,200                          11,200,000

2. Using Duo point Analysis

Profit Margin =    Net Income / sales

                                                        7,875,000 * 100%          11,200,000 * 100%

                                                          42,800,000                       56,000,000  

                                                =            18.4%                               20.0%

Investment Turnover   =   Sales / Invested asset  

                                                    42,800,000                          56,000,000

                                                     34,240,000                          70,000,000

                                               =     1.25                                       0.8

Return on Investment  using Duo-point =  Profit margin* Investment turnover

                   Business dividion =  18.4% *1.25 = 23%

                    Consumer division  =  20% * 0.8 =  16%

3. Residual Income

                                          Business dividion     Consumer division

Net income                             $7,875,200              $11,200,000

Imputed cost*                         (3,424,000)         (7,000,000)

Residual Income                     4,451,200             4,200,000

 

4. Evaluation of performance of eaxh division

In term of profit, consumer division perform better than business division but in term of return on investment, business dividion has better performance. in term of residual income, business dividion is better in tem of performance than the consumer division.

Explanation: