Effect of Proposals on Divisional Performance A condensed income statement for the Electronics Division of Gihbli Industries Inc. for the year ended December 31 is as follows: Sales $1,575,000 Cost of goods sold 891,000 Gross profit $684,000 Operating expenses 558,000 Income from operations $126,000 Invested assets $1,050,000 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 $1,050,000 investment must be increased to at least 20% 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 $300,000 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 $31,400. 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 $180,000, reduce cost of goods sold by $119,550, and reduce operating expenses by $60,000. Assets of $112,500 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 $189,000 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 $918,750 for the year. Required: 1. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for the Electronics Division for the past year. If required, round your answers to one decimal place. Electronics Division Profit margin fill in the blank 26da1307200bfc7_1% Investment turnover fill in the blank 26da1307200bfc7_2 ROI fill in the blank 26da1307200bfc7_3% 2. Prepare condensed estimated income statements and compute the invested assets for each proposal. Gihbli Industries Inc.-Electronics Division Estimated Income Statements For the Year Ended December 31 Proposal 1 Proposal 2 Proposal 3 Sales $fill in the blank 60d615fa1f9ef82_1 $fill in the blank 60d615fa1f9ef82_2 $fill in the blank 60d615fa1f9ef82_3 Cost of goods sold fill in the blank 60d615fa1f9ef82_4 fill in the blank 60d615fa1f9ef82_5 fill in the blank 60d615fa1f9ef82_6 Gross profit $fill in the blank 60d615fa1f9ef82_7 $fill in the blank 60d615fa1f9ef82_8 $fill in the blank 60d615fa1f9ef82_9 Operating expenses fill in the blank 60d615fa1f9ef82_10 fill in the blank 60d615fa1f9ef82_11 fill in the blank 60d615fa1f9ef82_12 Income from operations $fill in the blank 60d615fa1f9ef82_13 $fill in the blank 60d615fa1f9ef82_14 $fill in the blank 60d615fa1f9ef82_15 Invested assets $fill in the blank 60d615fa1f9ef82_16 $fill in the blank 60d615fa1f9ef82_17 $fill in the blank 60d615fa1f9ef82_18 3. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for each proposal. Round investment turnover and percentages to one decimal place. Proposal Profit margin Investment turnover ROI Proposal 1 fill in the blank f9e93b071fc7011_1% fill in the blank f9e93b071fc7011_2 fill in the blank f9e93b071fc7011_3% Proposal 2 fill in the blank f9e93b071fc7011_4% fill in the blank f9e93b071fc7011_5 fill in the blank f9e93b071fc7011_6% Proposal 3 fill in the blank f9e93b071fc7011_7% fill in the blank f9e93b071fc7011_8 fill in the blank f9e93b071fc7011_9%
Effect of Proposals on Divisional Performance
A condensed income statement for the Electronics Division of Gihbli Industries Inc. for the year ended December 31 is as follows:
| Sales | $1,575,000 |
| Cost of goods sold | 891,000 |
| Gross profit | $684,000 |
| Operating expenses | 558,000 |
| Income from operations | $126,000 |
| Invested assets | $1,050,000 |
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 $1,050,000 investment must be increased to at least 20% 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 $300,000 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 $31,400. 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 $180,000, reduce cost of goods sold by $119,550, and reduce operating expenses by $60,000. Assets of $112,500 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 $189,000 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 $918,750 for the year.
Required:
1. Using the DuPont formula for
| Electronics Division | ||
| Profit margin | fill in the blank 26da1307200bfc7_1% | |
| Investment turnover | fill in the blank 26da1307200bfc7_2 | |
| ROI | fill in the blank 26da1307200bfc7_3% |
2. Prepare condensed estimated income statements and compute the invested assets for each proposal.
| Gihbli Industries Inc.-Electronics Division | |||
| Estimated Income Statements | |||
| For the Year Ended December 31 | |||
| Proposal 1 | Proposal 2 | Proposal 3 | |
| Sales | $fill in the blank 60d615fa1f9ef82_1 | $fill in the blank 60d615fa1f9ef82_2 | $fill in the blank 60d615fa1f9ef82_3 |
| Cost of goods sold | fill in the blank 60d615fa1f9ef82_4 | fill in the blank 60d615fa1f9ef82_5 | fill in the blank 60d615fa1f9ef82_6 |
| Gross profit | $fill in the blank 60d615fa1f9ef82_7 | $fill in the blank 60d615fa1f9ef82_8 | $fill in the blank 60d615fa1f9ef82_9 |
| Operating expenses | fill in the blank 60d615fa1f9ef82_10 | fill in the blank 60d615fa1f9ef82_11 | fill in the blank 60d615fa1f9ef82_12 |
| Income from operations | $fill in the blank 60d615fa1f9ef82_13 | $fill in the blank 60d615fa1f9ef82_14 | $fill in the blank 60d615fa1f9ef82_15 |
| Invested assets | $fill in the blank 60d615fa1f9ef82_16 | $fill in the blank 60d615fa1f9ef82_17 | $fill in the blank 60d615fa1f9ef82_18 |
3. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for each proposal. Round investment turnover and percentages to one decimal place.
| Proposal | Profit margin | Investment turnover | ROI |
| Proposal 1 | fill in the blank f9e93b071fc7011_1% | fill in the blank f9e93b071fc7011_2 | fill in the blank f9e93b071fc7011_3% |
| Proposal 2 | fill in the blank f9e93b071fc7011_4% | fill in the blank f9e93b071fc7011_5 | fill in the blank f9e93b071fc7011_6% |
| Proposal 3 | fill in the blank f9e93b071fc7011_7% | fill in the blank f9e93b071fc7011_8 | fill in the blank f9e93b071fc7011_9% |
4. Which of the three proposals would meet the required 20% return on investment?
| Proposal 1 | |
| Proposal 2 | |
| Proposal 3 |
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 20% return on investment? Enter your increase in investment turnover answer as a percentage of current investment turnover. Round interim calculations (including previously calculated) and final answer to one decimal place.
fill in the blank f9e93b071fc7011_13%
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