A condensed income statement for the Electronics Division of Great Industries for the year ended 30 June 2020, 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

Assume that the Electronics Division received no charges from service departments. If operations are to continue, the CEO of Great Industries has indicated that the divisions rate of return on a $1,050,000 investment must be increased to at least 18% by the end of the next year. 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 $31,500. 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 $120,000 would be transferred to other divisions at no gain or loss.

Proposal 3:

Purchase more and new 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.

Required:

1. Prepare condensed estimated income statements and compute the invested assets for each proposal. (3 marks)

2. Using the DuPont formula, determine the profit margin, investment turnover and rate of return on investment (ROI) for the Electronics Division for the past year and for each proposal. Round investment turnover and rate of return to one decimal place. (4 marks)

3. Determine the residual income (RI) for the Electronics Division for the past year and for each proposal. (2 marks)

4. Which proposal should the division manager adopt? Explain. Would using ROI or RI lead to a different conclusion? Explain and elaborate your answer. (4 marks)

5. If the profit margin in the Electronics Division cannot be increased, how much would the investment turnover have to increase to meet the CEOs required 18%? How can the manager increase the investment turnover without increasing sales? Explain and elaborate your answer. (2 marks)