The Truck Division of Yang Motors Inc. has been experiencing revenue and profit growth during the years 2006–2008. The divisional income statements are provided below.
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Yang Motors Inc. |
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Divisional Income Statements, Truck Division |
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For the Years Ended December 31, 2006–2008 |
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2006 |
2007 |
2008 |
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Sales |
$756,000 |
$972,000 |
$1,170,000 |
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Cost of goods sold |
475,200 |
558,000 |
616,500 |
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Gross profit |
$280,800 |
$414,000 |
$ 553,500 |
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Operating expenses |
167,400 |
209,880 |
261,000 |
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Income from operations |
$113,400 |
$204,120 |
$ 292,500 |
Assume that there are no charges from service departments. The vice president of the division, Terry Clark, is proud of his division’s performance over the last three years. The president of Yang Motors Inc., Billy Clark, is discussing the division’s performance with Terry, as follows:
Terry: As you can see, we’ve had a successful three years in the Truck Division.
Billy: I’m not too sure.
Terry: What do you mean? Look at our results. Our income from operations has nearly tripled, while our profit margins are improving.
Billy: I am looking at your results. However, your income statements fail to include one very important piece of information; namely, the invested assets. You have been investing a great deal of assets into the division. You had $315,000 in invested assets in 2006, $810,000 in 2007, and $1,950,000 in 2008.
Terry: You are right. I’ve needed the assets in order to upgrade our technologies and expand our operations. The additional assets are one reason we have been able to grow and improve our profit margins. I don’t see that this is a problem.
Billy: The problem is that we must maintain a 20% rate of return on invested assets.
1. Determine the profit margins for the Truck Division for 2006–2008.
2. Compute the investment turnover for the Truck Division for 2006–2008.
3. Compute the rate of return on investment for the Truck Division for 2006–2008.
4. Evaluate the division’s performance over the 2006–2008 time period. Why was Billy concerned about the performance?