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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

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 rate of return on a $15,000,000 investment must be increased to at least 12% 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 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

If the Jet Ski 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 12% return on investment?

To determine

Concept Introduction:

Rate of return on investment represents the investment performance. It is beneficial for investor to compare different investments and select best investment. The benefit or return from the original cost of investment is return on investment.

The required increment in investment turnover to meet the required rate on investment of 12% if the profit margin cannot be changed.

Explanation

Calculation of profit margin:

  Profit Margin =Income from operationsSales$1,680,000$12,000,000=14%

Calculation of investment turnover:

  

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