Question

Titus Inc.
Segmented Income Statements
For the Current Fiscal Year Ended December 31
	Southeast Division	Northwest Division
Sales	$4,400,000	$2,600,000
Cost of goods sold	2,400,000	1,500,000
Gross margin	2,000,000	1,100,000
Allocated overhead (from corporate)	600,000	370,000
Selling and administrative expenses	430,000	340,000
Operating income	970,000	390,000
Income tax expense (35%)	339,500	136,500
Net income	630,500	$   253,500

Required:

(1)       Using the segmented income statements presented, determine the profit margin ratio for each division.          

(2)       Assume the Southeast division had average operating assets totaling $6,000,000 for the year, and the Northwest division had average operating assets totaling $1,800,000. Calculate return on investment (ROI) for each division.

(3)       Assume Titus has a cost of capital rate of nine percent. Calculate residual income for each division.

Answer 1

Answer:

1. Determination of profit margin ratio:

Profit margin ratio = (Net profit / Net Sales) x 100

For Southeast division:

Profit margin ratio = ($630,500 /$4,400,000) x 100

= 14.33%

For Northwest division:

Profit margin ratio = ($253,500 /$2,600,000) x 100

= 9.75%

2. Determination of Return on investment (ROI):

Return on Investment (ROI) = (Net Income / Average operating assets) x 100

For Southeast division:

Return on investment (ROI) = ($630,500 /$6,000,000) x 100

= 10.51%

For Northwest division:

Return on investment (ROI) = ($253,500 /$1,800,000) x 100

= 14.08%

3. Determination of Resudual Income:

Resudual Income = Net Income - (Average operating assets x Required Return)

For Southeast division:

Resudual Income = $630,500 - ($6,000,000 x 9%)

   = $90,500

For Northwest division:

Resudual Income = $253,500 - ($1,800,000 x 9%)

   = $91,500