Effect of Proposals on Divisional Performance A condensed income statement for t

Question

Effect of Proposals on Divisional Performance

A condensed income statement for the Electronics Division of Gihbli Industries Inc. for the year ended December 31, 20Y9, is as follows:

Assume that the Electronics Division received no charges from service departments.

The president of Gihbli Industries Inc. has indicated that the division’s return on a $3,100,000 investment must be increased to at least 16.5% by the end of the next year if operations are to continue. The division manager is considering the following three proposals:

Proposal 1: Transfer equipment with a book value of $620,000 to other divisions at no gain or loss and lease similar equipment. The annual lease payments would be less than the amount of depreciation expense on the old equipment by $111,600. This decrease in expense would be included as part of the cost of goods sold. Sales would remain unchanged.

Proposal 2: Reduce invested assets by discontinuing a product line. This action would eliminate sales of $658,800, reduce cost of goods sold by $440,200, and reduce operating expenses by $193,800. Assets of $1,569,500 would be transferred to other divisions at no gain or loss.

Proposal 3: Purchase new and more efficient machinery and thereby reduce the cost of goods sold by $409,200 after considering the effects of depreciation expense on the new equipment. Sales would remain unchanged, and the old machinery, which has no remaining book value, would be scrapped at no gain or loss. The new machinery would increase invested assets by $1,550,000 for the year.

Required:

1. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and rate of return on investment for the Electronics Division for the past year. Round your answers to one decimal place.

2. Prepare condensed estimated income statements and compute the invested assets for each proposal.

3. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for each proposal. Round your answers to one decimal place.

4. Which of the three proposals would meet the required 16.5% return on investment.

5. If the Electronics Division were in an industry where the profit margin could not be increased, how much would the investment turnover have to increase to meet the president's required 16.5% rate of return on investment? Enter your increase in investment turnover answer as a percentage of current investment turnover. If required, round your answer to one decimal place.
%

Sales $4,030,000 Cost of goods sold 2,983,700 Gross profit $ 1,046,300 Operating expenses 603,000 Income from operations $ 443,300 Invested assets $3,100,000

Explanation / Answer

Solution 1:

Profit margin for past year = Net operating income / Sales = $443,300 / $4,030,000 = 11%

Investment turnover for past year = Sales / Average operating assets = $4,030,000 / $3,100,000 = 1.3 times

ROI = Margin * Turnover = 11% * 1.30 = 14.30%

Solution 2:

Solution 3:

Solution 4:

All 3 proposals meets the required 16.5% return on investment.

Solution 5:

Existing profit margin = 11%

If profit margin could not be increased then required investment turnover to meet required return = 16.5 / 11 = 1.5 times

Current investment turnover = 1.3 times

Increase in investment turnvoer = 1.5 - 1.3 = 0.2

% increase in investment turnover = 0.2 / 1.3 = 15.4%

Gihbli Industries Inc. Estimated income statement For the year ended December 31, 20Y9 Particulars Proposal 1 Proposal 2 Proposal 3 Sales $4,030,000.00 $3,371,200.00 $4,030,000.00 Cost of goods sold $2,872,100.00 $2,543,500.00 $2,574,500.00 Gross Profit $1,157,900.00 $827,700.00 $1,455,500.00 Operating expenses $603,000.00 $409,200.00 $603,000.00 Income from operations $554,900.00 $418,500.00 $852,500.00 Invested assets $2,480,000.00 $1,530,500.00 $4,650,000.00

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.