The vice president of operations of 14 Computers Inc. is evaluating the performance of two division organized as investment centers. Invested assets and condensed income statement for the past year for each division are as follows:
- Personal Computing Division Business Computing Division
- Sales $800,000 $1,200,000
- Cost of Good Sold 460,000 780,000
- Operating Expenses 180,000 156,000
- Invested assets 500,000 2,000,000
Instructions
1. Prepare condensed divisional income statements for the year ended December 31, 2008, assuming that there were no service department charges.
2. Using the DunPont formula for rate of return on investment, determine the profit margin, investment turnover, and rate of return on investment for each division.
3. If management's minimum acceptable rate of return is 155, determine the residual income for each division.
4. Discuss the evalation of the two divisions, using the performance measures determined in parts (1),(2), and (3).