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Explain the importance of departmental income statement in an enterprise in which several separate departments function. Provide an example of a departmental income statement in
Explain the importance of departmental income statement in an enterprise in which several separate departments function. Provide an example of a departmental income statement in which at least three shared indirect costs are divided according to three different appropriate allocation bases. Provide a departmental return on investment analysis based on the template given in Exhibit 9-17 of the textbook.
LCD Division S-Phone Division $ 526,500 2,500,000 $ 417,600 1,850,000 Investment center average invested assets . . . . . . . .. Investment Center Return on Investment One measure to evaluate division perfor- mance is the investment center return on investment (ROI), commonly called return on assets (ROA). This measure is computed as follows: Investment center income Return on investment = Investment center average invested assets The return on investment for the LCD division is 21% (rounded), computed as $526,500/$2,500,000. The S-Phone division's return on investment is 23% (rounded), com- puted as $417,600/$1,850,000. ZTel's management can use ROI as part of its performance evaluation for its investment center managers. For example, the actual ROI can be compared to a targeted ROI or to the ROI for similar departments at competing businesses. Investment Center Residual Income Another way to evaluate division performance is to compute investment center residual income, which is computed as follows: Investment center income Target investment center Residual income incomne Assume ZTel's top management sets target income at 8% of investment center assets. For an investment center, this target is typically the cost of obtaining financing. Applying this target rate using the data from Exhibit 9.17 yields the residual income for ZTel's divisions shown in Exhibit 9.18
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