Question - The vice president of operations of14 computers inc. 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:
Personal Computing Division Business Computing Division
Sales $800,000 $1,200,000
COGS 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 DuPont 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 15% determine the residual income for each division.
4. Discuss the evaluation of the two divisions, using the performance measures determined in parts (1), (2), and (3).