Question

# Titus Inc. Segmented Income Statements For the Current Fiscal Year Ended December 31 Southeast Division Northwest...

 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.

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

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