Divisional performance analysis and evaluation

Free Ride Bike Company

Divisional Income Statements

For the Year Ended December $31,20$ Y$7$

Road Bike Mountain Bike

Division Division

Line Item Description

Sales

Cost of goods sold

Gross profit

Operating expenses

Operating income

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

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.