Question 23.IP.1: Quinn Company has two divisions, Domestic and International....
Quinn Company has two divisions, Domestic and International. Invested assets and condensed income statement data for each division for the year ended December 31, 2014, are as follows:
| Domestic Division | international Division | |
| Revenues | $675,000 | $480,000 |
| Operating expenses | 450,000 | 372,400 |
| Service department charges | 90,000 | 50,000 |
| Invested assets | 600,000 | 384,000 |
instructions
1. Prepare condensed income statements for the past year for each division.
2. Using the DuPont formula, 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 10%, determine the residual income for each division.
1.
| Quinn Company Divisional income Statements For the Year ended December 31, 2014 |
||
| Domestic Division | international Division | |
| Revenues | $675,000 | $480,000 |
| Operating expenses | 450,000 | 372,400 |
| Income from operations before service department charges | $225,000 | $107,600 |
| Service department charges | 90,000 | 50,000 |
| Income from operations |
|
|
2. Rate of Return on Investment = Profit Margin × Investment Turnover
Rate of Return on Investment = \frac{Income from Operations}{Sales} × \frac{Sales}{Invested Assets}
Domestic Division: ROI = \frac{\$ 135,000}{\$ 675,000} \times \frac{\$ 675,000}{\$ 600,000}
ROI = 20% × 1.125
ROI = 22.5%
International Division: ROI = \frac{\$ 57,600}{\$480,000} \times \frac{\$ 480,000}{\$ 384,000}
ROI = 12% × 1.25
ROI = 15%
3. Domestic Division: $75,000 [$135,000 – (10% × $600,000)]
International Division: $19,200 [$57,600 – (10% × $384,000)]