Divisional Income Statements with Support Department Allocations

Horton Technology has two divisions, Consumer and Commercial, and two corporate support departments, Tech Services and Purchasing. The corporate expenses for the year ended December 31, 20Y7, are as follows:

Tech Services Department	$831,900
Purchasing Department	365,000
Other corporate administrative expenses	515,000
Total expense	$1,711,900

The other corporate administrative expenses include officers' salaries and other expenses required by the corporation. The Tech Services Department allocates costs to the divisions based on the number of computers in the department, and the Purchasing Department allocates costs to the divisions based on the number of purchase orders for each department. The services used by the two divisions are as follows:

	Tech Services	Purchasing
Consumer Division	360	computers	5,100	purchase orders
Commercial Division	230		9,500
Total	590	computers	14,600	purchase orders

The support department allocations of the Tech Services Department and the Purchasing Department are considered controllable by the divisions. Corporate administrative expenses are not considered controllable by the divisions. The revenues, cost of goods sold, and operating expenses for the two divisions are as follows:

	Consumer	Commercial
Revenues	$7,469,100		$6,510,300
Cost of goods sold	4,149,500		3,287,400
Operating expenses	1,465,100		1,627,400

Prepare the divisional income statements for the two divisions. Do not round your interim calculations.

		Consumer Division		Commercial Division
Gross profitCashOperating incomeOperating expensesRevenuesRevenues		$Revenues		$Revenues
CashCost of goods soldGross profitOperating incomeTech service departmentGross profit		Gross profit		Gross profit
CashGross profitLoss from operationsOperating expensesRevenuesOperating expenses		$Operating expenses		$Operating expenses
CashOperating incomeLoss from operationsOperating expensesPurchasing departmentOperating income		Operating income		Operating income
Operating income before support department allocations		$fill in the blank 13		$fill in the blank 14
Support department allocations:
CashCost of goods soldOperating incomeOperating expensesTech service departmentTech service department	blank	$Tech service department	blank	$Tech service department
CashGross profitOperating incomeOperating expensesPurchasing departmentPurchasing department	blank	Purchasing department	blank	Purchasing department
Total support department allocations	blank	$fill in the blank 21	blank	$fill in the blank 22
Gross profitOperating incomeOperating income before service department chargesLoss from operationsOperating income

The operating income and the amount of invested assets in each division of Conley Industries are as follows:

	Operating Income	Invested Assets
Retail Division	$86,400		$480,000
Commercial Division	68,000		340,000
Internet Division	135,700		590,000

a. Compute the return on investment for each division. (Round to the nearest whole percentage.)

Division	Percent
Retail Division	fill in the blank 1 %
Commercial Division	fill in the blank 2 %
Internet Division	fill in the blank 3 %

b. Which division is the most profitable per dollar invested?

Commercial DivisionInternet DivisionRetail Division

The operating income and the amount of invested assets in each division of Conley Industries are as follows:

	Operating income	Invested Assets
Retail Division	$96,900		$510,000
Commercial Division	42,500		250,000
Internet Division	54,000		360,000

Assume that management has established a 8% minimum acceptable return for invested assets.

a. Determine the residual income for each division.

	Retail Division	Commercial Division	Internet Division
Operating income	$96,900	$42,500	$54,000
Minimum acceptable operating income as a percent of invested assets	fill in the blank 1		fill in the blank 2		fill in the blank 3
Residual income	$fill in the blank 4		$fill in the blank 5		$fill in the blank 6

b. Which division has the most residual income?

Commercial DivisionInternet DivisionRetail Division

Determining missing items in return and residual income computations

Data are presented in the following table of returns on investment and residual incomes:

Invested Assets	Operating Income	Return on Investment	Minimum Return on Investment	Minimum Acceptable Operating Income	Residual Income
$940,000		$244,400		(a)		15%		(b)		(c)
$540,000		(d)		(e)		(f)		$64,800		$21,600
$320,000		(g)		14%		(h)		$35,200		(i)
$240,000		$45,600		(j)		12%		(k)		(l)

Determine the missing items, identifying each item by the appropriate letter. For all amounts, round to the nearest whole number.

a.	fill in the blank 1	%
b.	$fill in the blank 2
c.	$fill in the blank 3
d.	$fill in the blank 4
e.	fill in the blank 5	%
f.	fill in the blank 6	%
g.	$fill in the blank 7
h.	fill in the blank 8	%
i.	$fill in the blank 9
j.	fill in the blank 10	%
k.	$fill in the blank 11
l.	$fill in the blank 12

Profit Margin, Investment Turnover, and Return on Investment

The condensed income statement for the Consumer Products Division of Tri-State Industries Inc. is as follows (assuming no support department allocations):

Sales	$1,710,000
Cost of goods sold	(769,500)
Gross profit	$940,500
Administrative expenses	(342,000)
Operating income	$598,500

The manager of the Consumer Products Division is considering ways to increase the return on investment.

a. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment of the Consumer Products Division, assuming that $2,850,000 of assets have been invested in the Consumer Products Division. Round the investment turnover to one decimal place.

Profit margin	fill in the blank 1 %
Investment turnover	fill in the blank 2
Return on investment	fill in the blank 3 %

b. If expenses could be reduced by $85,500 without decreasing sales, what would be the impact on the profit margin, investment turnover, and return on investment for the Consumer Products Division? Round the investment turnover to one decimal place.

Profit margin	fill in the blank 4 %
Investment turnover	fill in the blank 5
Return on investment	fill in the blank 6 %