Question

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, 20Y8, are as follows:

	Mutual Fund Division		Electronic Brokerage Division		Investment Banking Division
Fee revenue	$940,000		$990,000		$960,000
Operating expenses	456,000		415,800		351,600
Invested assets	2,200,000		2,900,000		3,900,000

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

Required:

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, 20Y8
	Mutual Fund Division	Electronic Brokerage Division	Investment Banking Division
Fee revenue	$	$	$
Operating expenses
Income from operations	$	$	$

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	%		%
Electronic Brokerage Division	%		%
Investment Banking Division	%		%

3. When faced with limited funds for expansion, management should consider an expansion of the (Mutual Fund, Investment Banking, or Electronic Brokerage) Division first.

Answer 1

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

	Mutual Fund Division	Electronic Brokerage Division	Investment Banking Division
Fee revenue	940000	990000	960000
Operating expenses	(456000)	(415800)	(351600)
Income from operations	484000	574200	608400

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	51.5%	0.4	20.6%
Electronic Brokerage Division	58.0%	0.3	17.4%
Investment Banking Division	63.4%	0.2	12.7%

3. Mutual funds should consider an expansion of the division first