The vice president of operations of Pavone 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:

	Business Division	Consumer Division
Sales	$2,160,000	$2,520,000
Cost of goods sold	1,270,000	1,330,000
Operating expenses	630,800	887,600
Invested assets	744,828	2,100,000

	Required:
1.	Prepare condensed divisional income statements for the year ended December 31, 2016, assuming that there were no service department charges.
2.	Using the DuPont formula for rate of return on investment, determine the profit margin, investment turnover, and rate of return on investment for each division. If required, round your final answer to one decimal place.
3.	If management desires a minimum acceptable rate of return of 17.00%, determine the residual income for each division. Use the minus sign to indicate a negative income.
4.	Discuss the evaluation of the two divisions, using the performance measures previously determined.

Divisional Income Statements

1. Prepare condensed divisional income statements for the year ended December 31, 2016, assuming that there were no service department charges.

PAVONE COMPANY

Divisional Income Statements

For the Year Ended December 31, 2016

1		Business Division	Consumer Division
2	Sales
3	Cost of goods sold
4	Gross profit
5	Operating expenses
6	Income from operations

Final Questions

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

	Profit Margin	Investment Turnover	ROI
Business Division	%		%
Consumer Division	%		%

3. If management desires a minimum acceptable rate of return of 17.00%, determine the residual income for each division. Use the minus sign to indicate a negative income.

	Residual Income
Business Division	$
Consumer Division	$

4. Discuss the evaluation of the two divisions, using the performance measures previously determined.

On the basis of income from operations, the Division is more profitable. However, income from operations does not consider the amount of invested assets in each division. On the basis of the rate of return on investment, the Division is more profitable. Even though the Division has a higher profit margin, the Division has a higher investment turnover, which generates the higher rate of return on investment. On the basis of residual income, the Division is the more profitable of the two divisions.