Show Me How

Divisional Performance Analysis and Evaluation

The vice president of operations of Free Ride Bike Company is evaluating the performance of two divisions organized as investment centers. Invested assets and condensed income statement data for the past year for each division are as follows:

	Road Bike Division		Mountain Bike Division
Sales	$ 5,940,000		$ 6,370,000
Cost of goods sold	2,614,000		2,994,000
Operating expenses	2,375,600		2,102,000
Invested assets	5,400,000		4,900,000

Required:

1. Prepare condensed divisional income statements for the year ended December 31, 20Y7, assuming that there were no service department charges.

Free Ride Bike Company
Divisional Income Statements
For the Year Ended December 31, 20Y7
	Road Bike Division	Mountain Bike Division
Sales
Cost of goods sold
Gross profit
Operating expenses
Income from operations

1. For each division, subtract operating expenses from gross profit.

Learning Objective 4.

2. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and rate of return on investment for each division. If required, round your answers to one decimal place.

Division	Profit Margin	Investment Turnover	ROI
Road Bike Division
Mountain Bike Division			3. If management desires a minimum acceptable rate of return of 17%, determine the residual income for each division. If required, use the minus sign to indicate a negative income.

	Residual Income
Road Bike Division
Mountain Bike Division

4. On the basis of income from operations, the Mountain Bike Division is the more profitable of the two divisions. However, income from operations does not consider the amount of invested assets in each division. On the basis of residual income, the Mountain Bike Division is the more profitable of the two divisions.