Accounting 26th Edition by Carl Warren ,Jim Reeve ,Jonathan Duchac

Exercise 53

Divisional performance analysis and evaluation
The vice president of operations of Pavone 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:

Instructions
1. Prepare condensed divisional income statements for the year ended December 31, 2016, assuming that there were no service department charges.
2. Using the DuPont formula for rate 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 17%, determine the residual income for divisions.
4. Discuss the evaluation of the two divisions, using the performance measures determined in parts (1), (2), and (3).