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%

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%

Survey of Accounting (Accounting I)

8th Edition

ISBN:9781305961883

Author:Carl Warren

Publisher:Carl Warren

Chapter14: Decentralized Operations

Section: Chapter Questions

Problem 14.4.4P: Effect of proposals on divisional performance A condensed income statement for the Jet Ski Division...

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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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