Question

The Crunchy Granola Company is a diversified food company that specializes in all natural foods. The company has three operating divisions organized as investment centers. Condensed data taken from the records of the three divisions for the year ended June 30, 20Y7, are as follows:

	Cereal Division	Snack Cake Division	Retail Bakeries Division
Sales	$26,300,000	$8,300,000	$9,850,000
Cost of goods sold	16,660,000	5,535,000	6,780,000
Operating expenses	8,325,000	2,018,000	2,282,000
Invested assets	6,575,000	2,766,667	4,925,000

The management of The Crunchy Granola 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.
2.	Using the DuPont formula for return on investment, compute the profit margin, investment turnover, and return on investment for each division. If required, round your final answers to one decimal place.
3.	If available funds permit the expansion of operations of only one division, which of the divisions would you recommend for expansion, based on parts (1) and (2)?

Answer 1

Divisional Income Statements
	Cereal Division	Snack Cake Division	Retail Bakeries Division
Sales	$26,300,000	$8,300,000	$9,850,000
Cost of goods sold	16,660,000	5,535,000	6,780,000
Gross Profit	9,640,000	2,765,000	3,070,000
Operating expenses	8,325,000	2,018,000	2,282,000
Operating income	1,315,000	747,000	788,000
Invested assets	6,575,000	2,766,667	4,925,000
2.Profit Margin = Operating Income/Sales	5.00%	9.00%	8.00%
Investment Turnover = Sales/Invested Assets	4.00	3.00	2.00
ROI = Margin*Turnover	20.00%	27.00%	16.00%
Snack Cake Division Since highest ROI