This is a continuation of the Kitchen Appliances example presented inNote 11.18 “Review Problem 11.3”, Note 11.26 “Review Problem 11.4”, andNote 11.33 “Review Problem 11.5”. Financial information for Kitchen Appliances is provided again as follows. Assume the cost of capital rate is 6 percent.
1. Calculate RI for each division.
2. How should this information be used to evaluate each division manager?
Review Problem 11.4:
This is a continuation of Note 11.18 “Review Problem 11.3” for Kitchen Appliances. Recall that Kitchen Appliances has two divisions broken out by region—a Southern division and a Northern division. The following segmented income statement is for the most recent fiscal year ended December 31 (you were asked to prepare this income statement in Note 11.18 “Review Problem 11.3”).
Segmented balance sheets for Kitchen Appliances appear as follows.
1. Calculate average operating assets for each division. (Hint: land held for sale is not an operating asset.)
2. Calculate ROI for each division.
3. What does the ROI tell you about each division at Kitchen Appliances?
Review Problem 11.3:
Kitchen Appliances has two divisions—a Southern division and a Northern division. The following segmented financial information is for the most recent fiscal year ended December 31 (dollar amounts are in thousands).
Assume the tax rate is 30 percent.
1. Prepare a segmented income statement using the format presented in Figure 11.3 “Segmented Income Statements (Game Products, Inc.)”.
2. Using net income as the measure, which division is most profitable? Explain why this conclusion might be misleading.
3. Calculate the profit margin ratio and explain why organizations often use this ratio rather than simply using net income?