=+Assume that the Water Sports Division received no charges from service departments.

The president of South Mountain Sports Inc. has indicated that the division’s rate of return on a $500,000 investment must be increased to at least 22% 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 $100,000 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 $18,000. This decrease in expense would be included as part of the cost of goods sold. Sales would remain unchanged.