FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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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 $4,160,000
Cost of goods sold 2,884,200
Gross profit $ 1,275,800
Operating expenses 735,000
Income from operations $ 540,800
Invested assets $3,200,000

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 $3,200,000 investment must be increased to at least 20.8% 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 $640,000 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 $115,200. 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 $680,000, reduce cost of goods sold by $454,400, and reduce operating expenses by $200,000. Assets of $1,620,200 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 $422,400 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 $1,600,000 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. Round your answers to one decimal place.

  Electronics Division
Profit margin fill in the blank d18b9afde04d005_1%  
Investment turnover fill in the blank d18b9afde04d005_2  
ROI fill in the blank d18b9afde04d005_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 da993f00d03dffc_1 $fill in the blank da993f00d03dffc_2 $fill in the blank da993f00d03dffc_3
Cost of goods sold fill in the blank da993f00d03dffc_4 fill in the blank da993f00d03dffc_5 fill in the blank da993f00d03dffc_6
Gross profit $fill in the blank da993f00d03dffc_7 $fill in the blank da993f00d03dffc_8 $fill in the blank da993f00d03dffc_9
Operating expenses fill in the blank da993f00d03dffc_10 fill in the blank da993f00d03dffc_11 fill in the blank da993f00d03dffc_12
Income from operations $fill in the blank da993f00d03dffc_13 $fill in the blank da993f00d03dffc_14 $fill in the blank da993f00d03dffc_15
Invested assets $fill in the blank da993f00d03dffc_16 $fill in the blank da993f00d03dffc_17 $fill in the blank da993f00d03dffc_18

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.

Proposal Profit Margin Investment Turnover ROI
Proposal 1 fill in the blank e908f6f7bf8ef91_1% fill in the blank e908f6f7bf8ef91_2 fill in the blank e908f6f7bf8ef91_3%
Proposal 2 fill in the blank e908f6f7bf8ef91_4% fill in the blank e908f6f7bf8ef91_5 fill in the blank e908f6f7bf8ef91_6%
Proposal 3 fill in the blank e908f6f7bf8ef91_7% fill in the blank e908f6f7bf8ef91_8 fill in the blank e908f6f7bf8ef91_9%

4.  Which of the three proposals would meet the required 20.8% return on investment.

Proposal 1  
Proposal 2  
Proposal 3  

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 20.8% 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.

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