Q1. Profit Margin, Investment Turnover, and Return on Investment

The condensed income statement for the Consumer Products Division of Fargo Industries Inc. is as follows (assuming no service department cost allocations):

Sales	$1,116,000
Cost of goods sold	502,200
Gross profit	$613,800
Administrative expenses	279,000
Income from operations	$334,800

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 $1,860,000 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
Rate of return on investment	fill in the blank 3%

b. If expenses could be reduced by $55,800 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
Rate of return on investment	fill in the blank 6%

Q2. Decision on Transfer Pricing

Materials used by the Instrument Division of T_Kong Industries are currently purchased from outside suppliers at a cost of $303 per unit. However, the same materials are available from the Components Division. The Components Division has unused capacity and can produce the materials needed by the Instrument Division at a variable cost of $251 per unit.

a. If a transfer price of $276 per unit is established and 38,800 units of materials are transferred, with no reduction in the Components Division's current sales, how much would T_Kong Industries' total income from operations increase? $fill in the blank 1

b. How much would the Instrument Division's income from operations increase? $fill in the blank 2

c. How much would the Components Division's income from operations increase? $fill in the blank 3

Q3. Profit Center Responsibility Reporting for a Service Company

Thomas Railroad Company organizes its three divisions, the North (N), South (S), and West (W) regions, as profit centers. The chief executive officer (CEO) evaluates divisional performance using income from operations as a percent of revenues. The following quarterly income and expense accounts were provided from the trial balance as of December 31:

RevenuesN Region	$1,085,200
RevenuesS Region	1,332,300
RevenuesW Region	2,295,200
Operating ExpensesN Region	687,700
Operating ExpensesS Region	792,900
Operating ExpensesW Region	1,388,000
Corporate ExpensesDispatching	555,000
Corporate ExpensesEquipment Management	255,200
Corporate ExpensesTreasurer's	165,000
General Corporate Officers' Salaries	364,500

The company operates three service departments: the Dispatching Department, the Equipment Management Department, and the Treasurer's Department. The Treasurer's Department and general corporate officers' salaries are not controllable by division management. The Dispatching Department manages the scheduling and releasing of completed trains. The Equipment Management Department manages the inventories of railroad cars. It makes sure the right freight cars are at the right place at the right time. The Treasurer's Department conducts a variety of services for the company as a whole. The following additional information has been gathered:

	North	South	West
Number of scheduled trains	4,600		5,600		8,300
Number of railroad cars in inventory	1,100		1,800		1,500

Required:

Question Content Area

1. Prepare quarterly income statements showing income from operations for the three regions. Use three column headings: North, South, and West. Do not round your interim calculations.

	North	South	West
Revenues	$fill in the blank 76aba1f91000035_1	$fill in the blank 76aba1f91000035_2	$fill in the blank 76aba1f91000035_3
Operating expenses	fill in the blank 76aba1f91000035_4	fill in the blank 76aba1f91000035_5	fill in the blank 76aba1f91000035_6
Income from operations before service department charges	$fill in the blank 76aba1f91000035_7	$fill in the blank 76aba1f91000035_8	$fill in the blank 76aba1f91000035_9
Less service department charges:
Dispatching	$fill in the blank 76aba1f91000035_10	$fill in the blank 76aba1f91000035_11	$fill in the blank 76aba1f91000035_12
Equipment Management	fill in the blank 76aba1f91000035_13	fill in the blank 76aba1f91000035_14	fill in the blank 76aba1f91000035_15
Total service department charges	$fill in the blank 76aba1f91000035_16	$fill in the blank 76aba1f91000035_17	$fill in the blank 76aba1f91000035_18
Income from operations	$fill in the blank 76aba1f91000035_19	$fill in the blank 76aba1f91000035_20	$fill in the blank 76aba1f91000035_21

Question Content Area

2. What is the profit margin of each division? Round to one decimal place.

Region	Profit Margin
North Region	fill in the blank 74a540fecf9cfe7_1%
South Region	fill in the blank 74a540fecf9cfe7_2%
West Region	fill in the blank 74a540fecf9cfe7_3%

Q4. Divisional Income Statements and Return on Investment Analysis

E.F. Lynch Company is a diversified investment company with three operating divisions organized as investment centers. Condensed data taken from the records of the three divisions for the year ended June 30, 20Y8, are as follows:

	Mutual Fund Division	Electronic Brokerage Division	Investment Banking Division
Fee revenue	$1,750,000		$1,810,000		$1,720,000
Operating expenses	854,000		760,600		1,216,000
Invested assets	6,400,000		5,300,000		3,500,000

The management of E.F. Lynch Company is evaluating each division as a basis for planning a future expansion of operations.

Required:

Question Content Area

1. Prepare condensed divisional income statements for the three divisions, assuming that there were no service department cost allocations.

	Mutual Fund Division	Electronic Brokerage Division	Investment Banking Division
Fee revenue	$fill in the blank 5a56c0f3f073011_1	$fill in the blank 5a56c0f3f073011_2	$fill in the blank 5a56c0f3f073011_3
Operating expenses	fill in the blank 5a56c0f3f073011_4	fill in the blank 5a56c0f3f073011_5	fill in the blank 5a56c0f3f073011_6
Income from operations	$fill in the blank 5a56c0f3f073011_7	$fill in the blank 5a56c0f3f073011_8	$fill in the blank 5a56c0f3f073011_9

Question Content Area

2. Using the DuPont formula for return on investment, compute the profit margin, investment turnover, and return on investment for each division. Round your answers to one decimal place.

Division	Profit Margin	Investment Turnover	ROI
Mutual Fund Division	fill in the blank 77dc87059ffe074_1%	fill in the blank 77dc87059ffe074_2	fill in the blank 77dc87059ffe074_3%
Electronic Brokerage Division	fill in the blank 77dc87059ffe074_4%	fill in the blank 77dc87059ffe074_5	fill in the blank 77dc87059ffe074_6%
Investment Banking Division	fill in the blank 77dc87059ffe074_7%	fill in the blank 77dc87059ffe074_8	fill in the blank 77dc87059ffe074_9%