Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Transcribed Image Text:A condensed income statement for the Electronics Division of Gihbli Industries Inc. for the year ended December 31 is as follows:
Sales
$2,760,000
Cost of goods sold
1,847,600
Gross profit
$ 912,400
Operating expenses
526,000
Income from operations
$ 386,400
Invested assets
$2,300,000
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 $2,300,000 investment must be increased to at least 19.6% 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 $460,000 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 $82,800. 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 $488,800, reduce cost of goods sold by $326,600, and reduce operating expenses by $143,800. Assets of
$1,164,500 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 $303,600 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 $1,150,000 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
Transcribed Image Text:Chapter 24 Graded
еBook
Invested assets
2,400,000
2,000,000
1,300,000
The management of E.F. Lynch Company is evaluating each division as a basis for planning a future expansion of operations.
Required:
1. Prepare condensed divisional income statements for the three divisions, assuming that there were no service department charges.
E.F. Lynch Company
Divisional Income Statements
For the Year Ended June 30, 20Y8
Mutual Fund Division Electronic Brokerage Division Investment Banking Division
Fee revenue
660,000 V
680,000
640,000
Operating expenses
324,000 v
284,000
452,800
336,000 V
396,000 v
Income from operations
187,200
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1. For each division, subtract operating expenses from fee revenue.
2. Using the DuPont formula for return on investment, compute the profit margin, investment turnover, and return on investment for each division. Round your answers to one decimal place.
Division
Profit Margin
Investment Turnover
ROI
Mutual Fund Division
50.9 v %
27.5 x
14 x %
Electronic Brokerage Division
58.2 v %
34 x
19.8 x %
Investment Banking Division
29.3 V %
49.2 X
14.4| Х %
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