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, 2048, are as follows: Mutual Fund Division Electronic Brokerage Division Investment Banking Division Fee revenue Operating expenses Invested assets $4,140,000 2,980,800 5,175,000 $3,360,000 3,091,200 1,120,000 $4,560,000 3,739,200 3,800,000 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 return on investment, compute the profit margin, investment turnover, and return on investment for each division. If required, round investment turnover to one decimal place. Division Profit Margin Investment Turnover Mutual Fund Division Electronic Brokerage Division Investment Banking Division 3. When faced with limited funds for expansion, management should consider an expansion of the Division first.

Answer 1

Divisional income statement

	Mutual fund division	Electronic brokerage division	Investment banking division
Fees revenue	4140000	3360000	4560000
Operating expense	-2980800	-3091200	-3739200
Income from operation	1159200	268800	820800

Calculate following

	Profit margin	Investment turnover	ROI
Mutual fund division	1159200/4140000 = 28%	4140000/5175000 = 0.8	28*.80 = 22.4%
Electronic brokerage division	268800/3360000 = 8%	3360000/1120000 = 3	8*3 = 24%
Investment banking division	820800/4560000 = 18%	4560000/3800000 = 1.2	18*1.2 = 21.60%

c) Electronic brokerage division first