1. A condensed income statement for the Commercial Division of McLean Manufacturing Inc. for the year ended December 31, 2020, is as follows:

Category	Dollar Amount
Sales	$3,600,000
Cost of goods sold	2,450,000
Gross profit	1,150,000
Operating expenses	600,000
Income from operations	550,000
Invested assets	2,500,000

Assume that the Commercial Division received no charges from service departments. The president of McLean Manufacturing has indicated that the divisions 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 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 $560,000 after considering the effects of depreciation expense on the new equipment. 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 $1,875,000 for the year.

Proposal 3: Reduce invested assets by discontinuing a product line. This action would eliminate sales of $595,000, reduce cost of goods sold by $406,700, and reduce operating expenses by $175,000. Assets of $1,338,000 would be transferred to other divisions at no gain or loss.

Problem 1 Instructions

1. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for the Commercial Division for the past year.
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 the investment turnover and return on investment to one decimal place.)
4. Which of the three proposals would meet the required 21% return on investment?
5. If the Commercial 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 21% return on investment?