Response to the following problem:
The vice president of operations of Montana 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:
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On-Road Bike Division
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Off-Road Bike Division
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Sales
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$10,500,000
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$8,000,000
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|
Cost of goods sold
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6,300,000
|
5,600,000
|
|
Operating expenses
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2,940,000
|
1,560,000
|
|
Invested assets
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7,500,000
|
5,000,000
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Instructions
1. Prepare condensed divisional income statements for the year ended December 31, 2012, assuming that there were no service department charges.
2. Using the DuPont formula for rate of return on investment, determine the profit margin, investment turnover, and rate of return on investment for each division.
3. If management desires a minimum acceptable rate of return of 15%, determine the residual income for each division.
4. Discuss the evaluation of the two divisions, using the performance measures determined in parts (1), (2), and (3).