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

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Effect of Proposals on Divisional Performance

A condensed income statement for the Golf Division of Rewind Sports Inc. for the year ended December 31, 2016, is as follows:

Sales $3,740,000
Cost of goods sold 2,857,000
Gross profit $ 883,000
Operating expenses 509,000
Income from operations $ 374,000
Invested assets $3,400,000

Assume that the Golf Division received no charges from service departments. The president of Rewind Sports has indicated that the division's rate of return on a $3,400,000 investment must be increased to at least 14% 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 $680,000 to other divisions at no gain or loss and lease similar equipment. The annual lease payments would exceed the amount of depreciation expense on the old equipment by $122,400. This increase in expense would be included as part of the cost of goods sold. Sales would remain unchanged.

Proposal 2: Purchase new and more efficient machining equipment and thereby reduce the cost of goods sold by $448,800 after considering the effects of depreciation expense on the new equipment. Sales would remain unchanged, and the old equipment, which has no remaining book value, would be scrapped at no gain or loss. The new equipment would increase invested assets by an additional $1,700,000 for the year.

Proposal 3: Reduce invested assets by discontinuing a product line. This action would eliminate sales of $722,500, cost of goods sold of $482,800, and operating expenses of $212,500. Assets of $1,721,400 would be transferred to other divisions at no gain or loss.

Required:

1. Using the An expanded expression of return on investment determined by multiplying the profit margin by the investment turnover.DuPont formula for A measure of managerial efficiency in the use of investments in assets, computed as income from operations divided by invested assets.rate of return on investment, determine the A component of the rate of return on investment, computed as the ratio of income from operations to sales.profit margin, A component of the rate of return on investment, computed as the ratio of sales to invested assets.investment turnover, and rate of return on investment for the Golf Division for the past year. Round your answers to one decimal place.

Golf Division
Profit margin %
Investment turnover
ROI %

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

Rewind Sports Inc.-Golf Division
Estimated Income Statements
For the Year Ended December 31, 2016
Proposal 1 Proposal 2 Proposal 3
Sales $ $ $
Cost of goods sold
Gross profit $ $ $
Operating expenses
Income from operations $ $ $
Invested assets $ $ $

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

Profit Margin Investment Turnover ROI
Proposal 1 % %
Proposal 2 % %
Proposal 3 % %

4. Select whether each of the three proposals would meet the required 14% rate of return on investment.

Proposal 1

Meets
Does not meet

Proposal 2

Meets
Does not meet

Proposal 3

Meets
Does not meet

5. If the Golf 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 14% 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.
%

Explanation / Answer

Answer for question no.1:

Answer for question no.2:

Answer for question no.3:

Answer for question no.4:

Proposal 2 is better, as the ROI and Profit margin are better than the other two proposals.

Golf division Calculations Profit margin Income from operations(1) 374000 Sales(2) 3740000 Profit margin=(2)/(1) 10.00% Investment turnover Turnover(3) 3740000 Avarage investment(4) 3400000 Investment turnover=(3)/(4) 1.1 Return on investment Operating profit(5) 374000 Investment(6) 3400000 ROI=(5)/(6) 0.11

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