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 Sales Cost of goods sold Gross profit Operating expenses Income from operations Invested assets $3,250,000 2,330,000 $ 920,000 530,000 $ 390,000 $2,500,000 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 $2,500,000 investment must be increased to at least 18% by the end of the next year if operations are to continue. The division manager is considering the following three proposals Proposa 1: Transfer equipment with a book value of $500,000 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 $90,000. 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 $531,300, reduce cost of goods sold by $355,000, and reduce operating expenses by $156,300. Assets of $1,265,800 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 $330,000 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 $1,250,000 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 Electronics Division Profit margin Investment turnover ROI

Explanation / Answer

1)Rate Of Return On investment =Profit Margin x Investment Turnover

Profit Margin=Income From Operations/Sales=$390,000/$3,250,000=12%

Investment Turnover=Sales/invested Assets=$3,250,000/2,500,000=1.3

Rate Of Return on Investment=12% * 1.3=15.6%

2)

Workings:

Proposal 1:COGS Decrease by $90,000=$2,330,000-$90,000=$2,240,000

Invested Assets Decrease By $500,000=$2,500,000-$500,000=$2,000,000

Proposal 2:Discontinued Product Line

Sales Decrease by $531,300= $3,250,000-$531,300=$2,718,700

COGS Decrease by $355,000 =$2,330,000-$355,000=$1,975,000

Operating Expenses Decrease By $156,300=$530,000-$156,300=$373,700

Invested Assets decrease by $1,265,800=$2,500,000-$1,265,800=$1,234,200

Proposal 3: COGS decrease by $330,000=$2,330,000-$330,000=$2,000,000

Invested Assets Increase By $1,250,000=$2,500,000+$1,250,000=$3,750,000

4)

ALL THREE PROPOSAL HAVE ROI GREATER THAN 18%

5)RATE OF RETURN OF INVESTMENT=PROFIT MARGIN x INVESTMENT TURNOVER

18%=12%(calaculated in part 1) x investment Turnover

Required Investment Turnover=1.5(18/12)

Current Investment Turnover=1.3(Calculated in Part 1)

Increase In turonver Required =0.2(1.5-1.3) or 15.38%(0.2/1.3)

Proposal 1 Proposal 2 Proposal 3 Sales(A) $3,250,000 $2,718,700 $3,250,000 Cost of goods sold $2,240,000 $1,975,000 $2,000,000 Gross Profit $1,010,000 $743,700 $1,250,000 Operating Expense $530,000 $373,700 $530,000 Income From Operations(B) $480,000 $370,000 $720,000 Invested Assets(C) $2,000,000 $1,234,200 $3,750,000 Profit Margin%(B/A=D) 14.77% 13.61% 22.15% Investment Turnover(A/C=E) 1.63 2.20 0.87 ROI%(D*E) 24.08% 29.94% 19.27%

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

---

---

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