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	$2,200,000	$2,490,000
Cost of goods sold	1,260,000	1,335,000
Operating expenses	720,000	806,400
Invested assets	1,100,000	2,490,000

	Required:
1.	Prepare condensed divisional income statements for the year ended December 31, assuming that there were no service department charges.
2.	Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for each division. If required, round your final answers to one decimal place.
3.	If management wants a minimum acceptable return of 18.00%, determine the residual income for each division. Use the minus sign to indicate a negative income. Round final answers to nearest whole dollar.
4.	Discuss the evaluation of the two divisions, using the performance measures previously determined.

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

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

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

3. If management wants a minimum acceptable return of 18.00%, determine the residual income for each division. Use the minus sign to indicate a negative income. Round final answers to nearest whole dollar.

Divisions	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 CONSUMER / BUSINESS 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 CONSUMER / BUSINESS Division is more profitable. Even though the Division has a higher profit margin, the CONSUMER / BUSINESS Division has a higher investment turnover, which generates the higher rate of return on investment. On the basis of residual income, the CONSUMER / BUSINESS Division is the more profitable of the two divisions.

Pavone Company Divisional Income Statements For the Year Ended December 31 Consumer Business Division Division 2 Sales 3 Cost of goods sold 4 Gross profit Operating expenses 6 Income from operations