Divisional Income Statements and Return on Investment Analysis

E$.$F$.$ Lynch Company is a diversified investment company with three operating divisions organized as investment centers. Condensed data taken from the records of the three divisions for the year ended June $30,20$Y$8,$ are as follows:

Mutual Fund Division

Electronic Brokerage Division

Investment Banking Division

Fee revenue $$790,000$ $$820,000$ $$790,000$

Operating expenses $424,600344,800598,000$

Invested assets $2,900,0002,400,0001,600,000$

The management of E$.$F$.$ Lynch Company is evaluating each division as a basis for planning a future expansion of operations.

Required:

Question Content Area

$1.$ Prepare condensed divisional income statements for the three divisions, assuming that there were no service department charges.

E$.$F$.$ Lynch Company

Divisional Income Statements

For the Year Ended June $30,20$Y$8$

Mutual Fund Division Electronic Brokerage Division Investment Banking Division

Fee revenue $fill in the blank $85$cacdfd$8$fb$7$f$98\_1$ $fill in the blank $85$cacdfd$8$fb$7$f$98\_2$ $fill in the blank $85$cacdfd$8$fb$7$f$98\_3$

Operating expenses fill in the blank $85$cacdfd$8$fb$7$f$98\_4$ fill in the blank $85$cacdfd$8$fb$7$f$98\_5$ fill in the blank $85$cacdfd$8$fb$7$f$98\_6$

Income from operations $fill in the blank $85$cacdfd$8$fb$7$f$98\_7$ $fill in the blank $85$cacdfd$8$fb$7$f$98\_8$ $fill in the blank $85$cacdfd$8$fb$7$f$98\_9$

Feedback Area

Feedback

$1.$ For each division, subtract operating expenses from fee revenue.

Learning Objective $4.$

Question Content Area

$2.$ Using the DuPont formula for rate of return on investment, compute the profit margin, investment turnover, and rate of return on investment for each division. Round your answers to one decimal place.

Division Profit Margin Investment Turnover ROI

Mutual Fund Division fill in the blank $6$ea$24502$afaafa$9\_1\%$ fill in the blank $6$ea$24502$afaafa$9\_2$ fill in the blank $6$ea$24502$afaafa$9\_3\%$

Electronic Brokerage Division fill in the blank $6$ea$24502$afaafa$9\_4\%$ fill in the blank $6$ea$24502$afaafa$9\_5$ fill in the blank $6$ea$24502$afaafa$9\_6\%$

Investment Banking Division fill in the blank $6$ea$24502$afaafa$9\_7\%$ fill in the blank $6$ea$24502$afaafa$9\_8$ fill in the blank $6$ea$24502$afaafa$9\_9\%$

$3.$ When faced with limited funds for expansion, management should consider an expansion of the

Division first.

Feedback Area

Feedback

$2.$ Income from operations divided by sales equals profit margin. Sales divided by invested assets equals investment turnover. Multiply these two percentages for the rate of return.

$3.$ Consider which division is the most profitable. Look at investment turnover and the impact of expansion on the company.

Learning Objective $4.$

Feedback Area

Feedback

Partially correct