2. Return on Investment (ROI) = Return on Investment (ROI) = Electronics Division: Profit Margin x Investment Turnover Income from Operations Sales ROI = x Gihbli Industries Inc.-Electronics Division Estimated Income Statements For the Year Ended December 31, 20Y9 Proposal 1 $ 1,575,000 891,000 Sales Cost of goods sold Gross profit Operating expenses Income from operations Invested assets Sales Invested Assets Proposal 2 $1,395,000 Proposal 3 $ 1,575,000 891,000 891,000 891,000 891,000 891,000 891,000* 891,000 891,000 891,000 891,000 891,000 Return on Investment (ROI) = Profit Margin x Investment Turnover Return on Investment (ROI) = Income from Operations Sales Sales x Invested Assets 3. Return on Investment (ROI) = Profit Margin x Investment Turnover Return on Investment (ROI) = Income from Operations Sales Proposal 1: ROI = Proposal 2: ROI = Proposal 3: ROI = meet(s) the required 20% rate of return on investment. Sales Invested Assets Return on Investment (ROI) = Profit Margin x Required Investment Turnover x Required Investment Turnover Required Investment Turnover = Current Investment Turnover Increase in Investment Turnover = Effect of proposals on divisional performance Obj. 4 A condensed income statement for the Electronics Division of Gihbli Industries Inc. for the year ended December 31, 20Y9, is as follows: Sales Cost of goods sold Gross profit Operating expenses Income from operations Invested assets $1,575,000 891,000 $ 684,000 558,000 $ 126,000 $1,050,000 EXCEL TEMPLATE 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 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.) Answer Check Figure: Proposal 3 ROI, 16.0% 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.)