(1)
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:
Formula of ROI according to Dupont formula:
To determine: Profit margin, investment turnover, and return on investment of E Division
(1)
![Check Mark](/static/check-mark.png)
Explanation of Solution
Determine ROI of E Division, if income from operations is $126,000, sales are $1,575,000, and assets invested are $1,050,000.
(2)
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.
To prepare: The income statements for E Division of Industries G for the year ended December 31, 2016, for each of the three proposals, and compute invested assets for each proposal
(2)
![Check Mark](/static/check-mark.png)
Explanation of Solution
Prepare divisional income statements for E Division of Industries G for the year ended December 31, 2016, for the three proposals.
Industries G | |||
Divisional Income Statements | |||
For the Year Ended December 31, 2016 | |||
Proposal 1 | Proposal 2 | Proposal 3 | |
Sales | $1,575,000 | $1,395,000 | $1,575,000 |
Cost of goods sold | 859,600 | 771,450 | 702,000 |
Gross profit | 715,400 | 623,550 | 873,000 |
Operating expenses | 558,000 | 498,000 | 558,000 |
Income from operations | $157,400 | $125,550 | $315,000 |
Table (1)
Working Notes:
Compute cost of goods sold under proposal 1.
Compute sales under proposal 2.
Compute cost of goods sold under proposal 2.
Compute operating expenses under proposal 2.
Compute cost of goods sold under proposal 3.
(3)
Profit margin, investment turnover, and return on investment of E Division under the three proposals
(3)
![Check Mark](/static/check-mark.png)
Explanation of Solution
Determine ROI of E Division, under proposal 1, if income from operations is $157,400, sales are $1,575,000, and assets invested are $750,000.
Note: Refer to part (1) for the values of income from operations and invested assets.
Determine ROI of E Division, under proposal 2, if income from operations is $125,550, sales are $1,395,000, and assets invested are $937,500.
Note: Refer to part (1) for the values of income from operations, sales, and invested assets.
Determine ROI of E Division, under proposal 3, if income from operations is $315,000, sales are $1,575,000, and assets invested are $1,968,750.
Note: Refer to part (1) for the values of income from operations and invested assets.
(4)
To indicate: The proposal which meets the desired ROI of 20%
(4)
![Check Mark](/static/check-mark.png)
Explanation of Solution
(5)
The increase in investment turnover to meet the desired return of 20%.
(5)
![Check Mark](/static/check-mark.png)
Explanation of Solution
Determine increase in investment turnover of E Division, if income from operations is $126,000 and sales are $1,575,000.
Step 1: Find the required investment turnover to earn desired ROI of 20%.
Step 2: Find the increase in investment turnover, if required investment turnover is 2.5 (From Step 1), and current investment turnover is 1.50 (From Part (1)).
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Chapter 23 Solutions
FINANCIAL AND MANAGERIAL ACCOUNTING
- Effect of proposals on divisional performance A condensed income statement for the Electronics Division of Gihbli Industries Inc. for the year ended December 31, 20Y9, is as follows: Assume that the Electronics Division received no allocations from support departments. The president of Gihbli Industries Inc. has indicated that the divisions return on a 1,050,000 investment must be increased to at least 20% 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 300,000 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 31,400. 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 180,000, reduce cost of goods sold by 119,550, and reduce operating expenses by 60,000. Assets of 112,500 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 189,000 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 918,750 for the year. Instructions 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 percentages and investment turnover to one decimal place.) 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 percentages and investment turnover to one decimal place.) 4. Which of the three proposals would meet the required 20% return on investment? 5. If the Electronics 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 20% return on investment? (Round to one decimal place.)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 $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 $4,420,000 Cost of goods sold 3,168,600 Gross profit $ 1,251,400 Operating expenses 721,000 Income from operations $ 530,400 Invested assets $3,400,000 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 $3,400,000 investment must be increased to at least 19.2% 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 $680,000 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 $122,400. This decrease in expense would be included as part of…arrow_forward
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- Effect of Proposals on Divisional Performance A condensed income statement for the Commercial Division of Maxell Manufacturing Inc. for the year ended December 31 is as follows: Sales $3,500,000 Cost of goods sold 2,480,000 Gross profit $1,020,000 Operating expenses 600,000 Income from operations $420,000 Invested assets $2,500,000 Assume that the Commercial Division received no charges from service 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 depreciation expense on the old equipment by $105,000. This increase in expense would be included as part of the cost…arrow_forwardEffect 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: Sales $3,640,000 Cost of goods sold (2,351,000) Gross profit $ 1,289,000 Operating expenses (743,000) Operating income $ 546,000 Invested assets $2,800,000 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 $2,800,000 investment must be increased to at least 24% 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 $560,000 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 $100,800. This increase in expense would be included as part of the cost of…arrow_forwardA 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_forward
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