(1)
Prepare the income statements for C, SC, and RB Divisions of Company CG for the year ended June 30, 20Y7
(1)
Explanation of Solution
Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.
Profit margin: This ratio gauges the operating profitability by quantifying the amount of income earned from business operations from the sales generated.
Formula of profit margin:
Investment turnover: This ratio gauges the operating efficiency by quantifying the amount of sales generated from the assets invested.
Formula of investment turnover:
Formula of ROI according to DuPont formula:
Prepare divisional income statements for C, SC, and RB Divisions of Company CG for the year ended June 30, 20Y7.
Company CG | |||
Divisional Income Statements | |||
For the Year Ended June 30, 20Y7 | |||
C Division | SC Division | RB Division | |
Sales | $25,000,000 | $8,000,000 | $9,750,000 |
Cost of goods sold | 16,670,000 | 5,575,000 | 6,795,000 |
Gross profit | 8,330,000 | 2,425,000 | 2,955,000 |
Operating expenses | 7,330,000 | 1,945,000 | 2,272,500 |
Income from operations | $1,000,000 | $480,000 | $682,500 |
Table (1)
(2)
Ascertain the Profit margin, investment turnover, and return on investment of C, SC, and RB Divisions
(2)
Explanation of Solution
a)
Determine ROI of C Division, if income from operations is $1,000,000 (From part (1)), sales are $25,000,000, and assets invested are $10,000,000.
b)
Determine ROI of SC Division, if income from operations is $480,000 (From part (1)), sales are $8,000,000, and assets invested are $4,000,000.
c)
Determine ROI of RB Division, if income from operations is $682,500 (From part (1)), sales are $9,750,000, and assets invested are $6,500,000.
(3)
Recommend the expansion of the profitable division, based on income from operations and ROI, computed in parts (1) and (2)
(3)
Explanation of Solution
The division with highest return on investment is considered as the most profitable division. Hence, SC Division is the most profitable division with highest ROI of 12.0%. Although income from operations are less than C Division, the return earned per dollar of assets invested is high for SC Division. So, it is recommended to expand the SC Division, assuming that the ROI would be standard.
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