Question
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
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.
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1. Prepare condensed divisional income statements for the year ended December 31, assuming that there were no service department charges.
Pavone Company |
Divisional Income Statements |
For the Year Ended December 31 |
1 |
| Business Division | Consumer Division |
2 | Sales |
|
|
3 | Cost of goods sold |
|
|
4 | Gross profit |
|
|
5 | Operating expenses |
|
|
6 | Income from operations |
|
|
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 |
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