Effect of proposals on divisional performance
A condensed income statement for the Jet Ski Division of Amazing Rides Inc. for the year ended December 31. 20Y2, is as follows
Assume that the Jet Ski Division received no charges from service departments. The president of Amazing Rides has indicated that the division's
Proposal 1: Transfer equipment with a book value of J3.000.000 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 $264,000. 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 $480,000. 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 $1,000,000 for the year.
Proposal 5? Reduce invested assets by discontinuing the tandem jet ski line. This action would eliminate sales of $2,280,000, cost of goods sold of $1,400,000, and operating expenses of $463,600. Assets of $4,200,000 would be transferred to other divisions at no gain or loss.
Instructions
Which of the three proposals would meet the required 12%
Trending nowThis is a popular solution!
Chapter 14 Solutions
Survey of Accounting (Accounting I)
- 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 divisions 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 depreciation expense on the old equipment by 105,000. 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 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 presidents required 21% return on investment?arrow_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: 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_forwardCoolbrook Company has the following information available for the past year: River Stream Division Division Sales revenue $1,200,000 900,000 $1,800,000 1,300,000 Cost of goods sold and operating expenses Net operating income $ 300,000 $ 500,000 Average invested assets $1,200,000 $1,800,000 The company's hurdle rate is 6 percent. Required: 1. Calculate return on investment (ROI) and residual income for each division for last year. 2. Recalculate ROI and residual income for each division for each independent situation that follows: a. Operating income increases by 10 percent. b. Operating income decreases by 10 percent. c. The company invests $250,000 in each division, an amount that generates $100,000 additional income per division. d. Coolbrook changes its hurdle rate to 10 percent. Complete this question by entering your answers in the tabs below. Req 1 Reg 2A Req 28 Reg 20 Reg 2D Calculate return on investment (ROI) and residual income for each division for last year. (Enter your ROI…arrow_forward
- Sunland Corporation recently announced a bonus plan to reward the manager of its most profitable division. The three divisional managers are to decide which performance measure will be used to evaluate profitability. Sunland Corporation requires a 10% minimum return on investment. The following information is available for the year just ended. Divisional Divisional Operating Invested Division Operating Assets Income Capital Ashton $870,000 $93,090 $197,000 Drye 790,000 88,480 67,000 Poole 485,000 57,230 117,000arrow_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. Investe assets and condensed income statement data for the past year for each division are as follows: Sales Cost of goods sold Operating expenses Invested assets Required: Road Bike Division $ 5,610,000 2,468,000 2,076,100 5,100,000 Mountain Bike Division $ 5,880,000 2,764,000 1,763,600 4,200,000 1. Prepare condensed divisional income statements for the year ended December 31, 20Y7, assuming that there were no service department charges. Free Ride Bike Company Divisional Income Statements For the Year Ended December 31, 20Y7 Road Bike Division Mountain Bike Division Sales Cost of goods sold Gross profit Operating expenses Income from operationsarrow_forwardThe vice president of operations of Scott Hall and Associates 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: Category Road Bike Division Mountain Bike Division Sales $1,750,000 $1,810,000 Cost of goods sold 1,300,000 1,440,000 Operating expenses 202,000 236,800 Invested assets 1,400,000 800,000 Prepare condensed divisional income statements for the year ended December 31, 2021, assuming that there were no service department charges. Using the DuPont formula for return on investment, determine the profit margin percentage, investment turnover, and return on investment for each division. (Round percentages and the investment turnover to two places behind the decimal.) If management’s minimum acceptable return on investment is 10%, determine the residual income for each division. In your own words…arrow_forward
- Required information [The following information applies to the questions displayed below.] ACME Food Manufacturing reports the following for two of its divisions for a recent year. ($ millions) Beverage Division Cheese Division Invested assets, beginning Invested assets, ending $2,675 2,599 2,687 $4,468 4,406 3,931 Sales Operating income 355 640 Assume that each of the company's divisions has a required rate of return of 8%. Compute residual income for each division. (Enter your answers in millions.) ($ millions) Beverage Cheese Targeted return Target income Residual Income Beverage Cheese Residual incomearrow_forwardThe vice president of operations of Scott Hall and Associates 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: Category Sales Cost of goods sold Operating expenses Invested assets C. Road Bike Division $1,750,000 1,300,000 202,000 1,400,000 Mountain Bike Division $1,810,000 1,440,000 236,800 800,000 Instructions a. Prepare condensed divisional income statements for the year ended December 31, 2021, assuming that there were no service department charges. b. Using the DuPont formula for return on investment, determine the profit margin percentage, investment turnover, and return on investment for each division. (Round percentages and the investment turnover to two places behind the decimal.) If management's minimum acceptable return on investment is 10%, determine the residual income for each division. d. In your own words evaluate the performance of the…arrow_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: Road Bike Division Mountain Bike Division Sales $1,728,000 $1,760,000 Cost of goods sold 1,380,000 1,400,000 Operating expenses 175,200 236,800 Invested assets 1,440,000 800,000 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 Road Bike Division Mountain Bike Division Sales $fill in the blank e15b55006fabff7_1 $fill in the blank e15b55006fabff7_2 Cost of goods sold fill in the blank e15b55006fabff7_3 fill in the blank e15b55006fabff7_4 Gross profit…arrow_forward
- 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: Road Bike Division Mountain Bike Division Sales $ 3,190,000 $ 3,360,000 Cost of goods sold 1,404,000 1,579,000 Operating expenses 1,275,600 1,344,200 Invested assets 2,900,000 2,400,000 Required: 1. Prepare condensed divisional income statements for the year ended December 31, 20Y7, assuming that there were no service department charges. Free Ride Bike Company Divisional Income Statements For the Year Ended December 31, 20Y7 Road Bike Division Mountain Bike Division Sales $fill in the blank 747434fe2fcbfee_1 $fill in the blank 747434fe2fcbfee_2 Cost of goods sold fill in the blank 747434fe2fcbfee_3 fill in the blank 747434fe2fcbfee_4 Gross…arrow_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: Road Bike Division Mountain Bike Division Sales $1,728,000 $1,760,000 Cost of goods sold 1,380,000 1,400,000 Operating expenses 175,200 236,800 Invested assets 1,440,000 800,000 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 Road Bike Division Mountain Bike Division Sales $ $ Cost of goods sold Gross profit $ $ Operating expenses Operating income $ $ 2. Using the DuPont formula for return on investment, determine the…arrow_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: Road Bike Division Mountain Bike Division Sales $2,090,000 $2,240,000 Cost of goods sold 920,000 1,053,000 Operating expenses 793,800 851,000 Invested assets 1,900,000 1,600,000 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 Road Bike Division Mountain Bike Division Sales Cost of goods sold Gross profit Operating expenses Operating income $ 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_forward
- Survey of Accounting (Accounting I)AccountingISBN:9781305961883Author:Carl WarrenPublisher:Cengage LearningFinancial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College Pub