The vice president of operations of Avigi IQ 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 $1,800,000 $1,850,000
Cost of goods sold 940,000 950,000
Operating expenses 572,000 493,000
Invested assets 1,200,000 2,312,500
Instructions
1. Prepare condensed divisional income statements for the year ended December 31, 2012, assuming that there were no service department charges.
2. Using the 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 desires a minimum acceptable rate of return of 18%, 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).