Effect of proposals on divisional performance
A condensed income statement for the Commercial Division of Maxell Manufacturing Inc. for the year ended December 31, 20Y9, is as follows:
Assume that the Commercial Division received no allocations from support departments. The president of Maxell Manufacturing has indicated that the division’s return on a $2,500,000 investment must be increased to at least 21% 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 $312,500 to other divisions at no gain or loss and lease similar equipment. The annual lease payments would exceed the amount of
Proposal 2: Purchase new and more efficient machining equipment and thereby reduce the cost of goods sold by $560,000 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 $1,875,000 for the year.
Proposal 3: Reduce invested assets by discontinuing a product line. This action would eliminate sales of $595,000, reduce cost of goods sold by $406,700, and reduce operating expenses by $175,000. Assets of $1,338,000 would be transferred to other divisions at no gain or loss.
Instructions
- 1. Using the DuPont formula for
return on investment , determine the profit margin, investment turnover, and return on investment for the Commercial Division for the past year. - 2. Prepare condensed estimated income statements and compute the invested assets for each proposal.
- 3. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for each proposal. Round the investment turnover and return on investment to one decimal place.
- 4. Which of the three proposals would meet the required 21% return on investment?
- 5. If the Commercial 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 21% return on investment?
(1)
Ascertain the Profit margin, investment turnover, and return on investment of C Division.
Explanation of Solution
Profit margin: This ratio gauges the operating profitability by quantifying the amount of income earned from business operations from the sales generated.
Formula of profit margin:
Investment turnover: This ratio gauges the operating efficiency by quantifying the amount of sales generated from the assets invested.
Formula of investment turnover:
Return on investment (ROI): This financial ratio evaluates how efficiently the assets are used in earning income from operations. So, ROI is a tool used to measure and compare the performance of a units or divisions or a companies.
Formula of ROI according to Dupont formula:
Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.
Determine ROI of C Division, if income from operations is $420,000, sales are $3,500,000, and assets invested are $2,500,000.
(2)
Prepare the income statements for C Division of Company M for the year ended December 31, for each of the three proposals, and compute invested assets for each proposal and also compute the invested assets for each proposal.
Explanation of Solution
Prepare divisional income statements for C Division of Company M for the year ended December 31, for the three proposals.
Company M | |||
Divisional Income Statements | |||
For the Year Ended December 31 | |||
Proposal 1 | Proposal 2 | Proposal 3 | |
Sales | $3,500,000 | $3,500,000 | (3) $2,905,000 |
Cost of goods sold | (1) 2,585,000 | (2) 1,920,000 | (4) 2,073,300 |
Gross profit | 915,000 | 1,580,000 | 831,700 |
Operating expenses | 600,000 | 600,000 | (5) 425,000 |
Income from operations | $315,000 | $980,000 | $406,700 |
Table (1)
Working Notes:
(1) Compute cost of goods sold under proposal 1.
(2) Compute cost of goods sold under proposal 2.
(3) Compute sales under proposal 3.
(4) Compute cost of goods sold under proposal 3.
(5) Compute operating expenses under proposal 3.
Compute the invested assets for each proposal:
Compute invested assets for proposal 1.
Compute invested assets for proposal 2.
Compute invested assets for proposal 3.
(3)
Ascertain the Profit margin, investment turnover, and return on investment of C Division under the three proposals
Explanation of Solution
1)
Ascertain the ROI of C Division, under proposal 1, if income from operations is $315,000, sales are $3,500,000, and assets invested are $2,187,500.
Note: Refer to part (1) for the values of income from operations and invested assets.
2)
Ascertain the ROI of C Division, under proposal 2, if income from operations is $980,000, sales are $3,500,000, and assets invested are $4,375,000.
Note: Refer to part (1) for the values of income from operations and invested assets.
3)
Ascertain the ROI of C Division, under proposal 3, if income from operations is $406,700, sales are $2,905,000, and assets invested are $1,162,000.
Note: Refer to part (1) for the values of income from operations and invested assets.
(4)
Indicate the proposal which meets the desired ROI of 22.4%
Explanation of Solution
Proposal 3 meets desired ROI of 22.4% because the proposal has 35.0% ROI.
(5)
Ascertain the increase in investment turnover to meet the desired return of 21%
Explanation of Solution
Ascertain the increase in investment turnover of C Division, if income from operations is $406,700 and sales are $2,905,000.
Step 1: Find the required investment turnover to earn desired ROI of 21%.
Step 2: Find the increase in investment turnover, if required investment turnover is 1.75 (From Step 1), and current investment turnover is 1.40 (From Part (1)).
Want to see more full solutions like this?
Chapter 10 Solutions
Managerial Accounting
- Divisional performance analysis and evaluation The vice president of operations of Free Ride Bike Company is evaluating the performance of two divisions organized as investment centers. Invested assets and condensed income statement data for the past year for each division are as follows: Instructions 1. Prepare condensed divisional income statements for the year ended December 31, 20Y7, assuming that there were no support department allocations. 2. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for each division. Round percentages and the investment turnover to one decimal place. 3. If managements minimum acceptable return on investment is 10%, determine the residual income for each division. 4. Discuss the evaluation of the two divisions, using the performance measures determined in parts (1), (2), and (3).arrow_forwardDivisional performance analysis and evaluation The vice president of operations of Recycling Industries is evaluating the performance of two divisions organized as investment centers. Invested assets and condensed income statement data for the past year for each division are as follows: Instructions 1. Prepare condensed divisional income statements for the year ended December 31, 20Y8, assuming that there were no support department allocations. 2. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for each division. (Round percentages to one decimal place and the investment turnover to two decimal places.) 3. If management desires a minimum acceptable return on investment of 10%, determine the residual income for each division. 4. Discuss the evaluation of the two divisions, using the performance measures determined in parts (1), (2), and (3).arrow_forwardThe operating income and the amount of invested assets in each division of Conley Industries are as follows: a. Compute the return on investment for each division. b. Which division is the most profitable per dollar invested? Based on the data in Exercise 10 assume that management has established a 15% minimum acceptable return for invested assets. a. Determine the residual income for each division. b. Which division has the most residual income?arrow_forward
- 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…arrow_forwardEffect 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 $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…arrow_forwardEffect 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 $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…arrow_forward
- Earrow_forwardDivisional Performance Analysis and Evaluation The vice president of operations of Free Ride Bike Company is evaluating the performance of two divisions organized as investment centers. Invested assets and condensed income statement data for the past year for each division are as follows: Mountain Bike Division Road Bike Division Sales Cost of goods sold Operating expenses Invested assets Required: 1. Prepare condensed divisional income statements for the year ended December 31, 20Y7, assuming that there were no support department allocations. Free Ride Bike Company Divisional Income Statements For the Year Ended December 31, 20Y7 Sales Cost of goods sold Gross profit Operating expenses Operating income $ Road Bike Division Road Bike Division $3,410,000 1,500,000 1,330,300 3,100,000 $ Road Bike Division Mountain Bike Division 2. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and rate of return on investment for each division. If…arrow_forwardThe vice president of operations of Moab Bike Company is evaluating the performance of two divisions organized as investment centers. Invested assets and condensed income statement data for the past year ending October 31, 20Y9, for each division are as follows: Instructions Prepare condensed divisional income statements for the year ended October 31, 20Y9, assuming that there were no service department charges. Touting Bike Division Trial Bike Divisionarrow_forward
- A portion of the divisional income statement for the year just ended is presented below in a condensed form. Department F Net sales $93,800 Cost of goods sold 72,400 Gross profit $21,400 Operating expenses 28,900 Loss from operations $(7,500) The operating expenses of Department F include $16,000 for direct expenses. It is estimated that the discontinuance of Department F would not have affected the sales of the other departments nor have reduced the indirect expenses of the business. Assuming the accuracy of these estimates, determine the effect (increase or decrease and the amount) on the operating income of the business if Department F had been discontinued. X Decreasearrow_forward2. Using the DuPont formula, determine the profit margin, investment turnover, and return on investment for each division. (Round to 2nd decimal places). 3. If management desires a minimum acceptable rate of return of 8%, determine the residual income for each division. 4. Discuss the evaluation of the two divisions, using the performance measures determined in parts (1), (2), and (3).arrow_forwardplease answer in text form and in proper format answer with must explanation , calculation for each part and steps clearlyarrow_forward
- Survey of Accounting (Accounting I)AccountingISBN:9781305961883Author:Carl WarrenPublisher:Cengage LearningManagerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubFinancial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningManagerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning