# Effect of proposals on divisional performance A condensed income statement for the Electronics Division of Gihbli Industries Inc. for live year ended December 31 is as follows: Sales $1.575,000 Cost of goods sold 891,000 Gross profit$684,000 Operating expenses 558,000 Income from operations $126,000 Invested assets$1,050,000 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 $1,050,000 investment must be increased to at least 20% by the end of tin- 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 the 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 the 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 president's required 20% return on investment? Round to one decimal place. BuyFind ### Accounting 27th Edition WARREN + 5 others Publisher: Cengage Learning, ISBN: 9781337272094 BuyFind ### Accounting 27th Edition WARREN + 5 others Publisher: Cengage Learning, ISBN: 9781337272094 #### Solutions Chapter Section Chapter 24, Problem 24.4BPR Textbook Problem ## Effect of proposals on divisional performance A condensed income statement for the Electronics Division of Gihbli Industries Inc. for live year ended December 31 is as follows: Sales$1.575,000 Cost of goods sold 891,000 Gross profit $684,000 Operating expenses 558,000 Income from operations$126,000 Invested assets $1,050,000 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$1,050,000 investment must be increased to at least 20% by the end of tin- 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 the 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 the 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 president's required 20% return on investment? Round to one decimal place.

Expert Solution

(1)

To determine

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:

Profit margin=Income from operationsSales

Investment turnover: This ratio gauges the operating efficiency by quantifying the amount of sales generated from the assets invested.

Formula of investment turnover:

Investment turnover=SalesInvested assets

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:

Return on investment = Profit margin × Investment turnover=Income from operationsSales×SalesInvested assets=Income from operationsInvested assets

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 determine: Profit margin, investment turnover, and return on investment of E Division

### 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. Return on investment = Profit margin × Investment turnover=Income from operationsSales×SalesInvested assets=$126,000\$1,575,000×

Expert Solution

(2)

To determine

To prepare: The income statements for E Division of Company M for the year ended December 31, for each of the three proposals, and compute invested assets for each proposal

Expert Solution

(3)

To determine
Profit margin, investment turnover, and return on investment of E Division under the three proposals

Expert Solution

(4)

To determine

To indicate: The proposal which meets the desired ROI of 20%

Expert Solution

(5)

To determine
The increase in investment turnover to meet the desired return of 20%

### Want to see the full answer?

Check out a sample textbook solution.See solution

### Want to see this answer and more?

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

See solution

Find more solutions based on key concepts
Show solutions
Why is productivity important?

Principles of Microeconomics (MindTap Course List)

What is the difference between contribution margin and segment margin?

Managerial Accounting: The Cornerstone of Business Decision-Making

What is ethics?

Accounting Information Systems

SECURITY MARKET LINE You plan to invest in the Kish Hedge Fund, which has total capital of 500 million invested...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)