Practice Problem 1

Health Quest operates fitness centers and organizes its operations into three geographical areas: Western, Midwestern, and Eastern Divisions. The following shows Health Quests divisional income statements from last year.

	WesternDivision	MidwesternDivision	EasternDivision	Total
Sales	$2,800,000	$2,226,000	$3,391,060	$8,417,060
Cost of sales	1,497,000	1,201,000	1,648,059	4,346,059
Gross margin	1,303,000	1,025,000	1,743,001	4,071,001
Operating expenses	503,000	385,000	663,000	1,551,000
Allocated corporate overhead	228,571	182,857	308,572	720,000
Operating income	571,429	457,143	771,429	1,800,001
Income tax (30%)	171,429	137,143	231,429	540,001
After-tax income	$ 400,000	$ 320,000	$ 540,000	$1,260,000

Required:

Calculate the gross margin ratio, the operating margin ratio, and the profit margin ratio for the three divisions of Health Quest.

Practice Problem 2

(Continued from Demonstration Problem 1)

The divisional balance sheets of Health Quest showed the investment bases (divisional assets) as follows.

Division	Divisional Assets
Western Division	$2,000,000
Midwestern Division	1,720,000
Eastern Division	2,550,000

Required:

Calculate ROI and its associated profit margin ratio and asset turnover ratio for the three divisions of Health Quest.

Practice Problem 3

(Continued from Demonstration Problems 1 and 2)

Required:

Calculate the residual income for the three divisions of Health Quest, assuming a 12% cost of capital.