Chapter 14 Home W APPACH Effect of Proposal on Divisional Performance Acondensed income statement for the Jet Ski Division of Amazing Todes Inc. for the year ended December 31, 2012 is as follows Sales Cost of goods sold Gross profit $3,720,000 (2,578,400) $1,141,600 (658,000) $483,600 Operating expenses Operating income Invested assets $3,100,000 Assume that the Jet Ski Division received no charges from service departments. The president of Amazing Rides has Indicated that the division's rate of return on a $3,100,000 investment must be increased to at least 19.5% by the end of the next year if operations are to continue. The division manager is considering the following three proposals: Proposal : Transfer equipment with a book value of $620,000 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 equipmest by $111,600. 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 S409,200. Sales would remain unchanged, and the old equipment, which has no remaining book value, would be scrapped at no pain or loss. The new equipment would increase Wested assets by an additional $1,550,000 for the year Proposal 3: Reduce invested assets by discontinuing the tandem jet ski line. This action would eliminate sales of $658,800, cost of goods sold of $440,200, and operating expenses of $193,800, Assets of $1,569,500 would be transferred to other divisions of no gain or loss. Required: 1. Using the DuPont formula for return on investment, determine the profit margin investment turnover, and return on investment for the Jet Ski Division for the past year. For investment turnover and ROI, round to one decimal place Jet Ski Division Profit margin Investment turnover ROL 25 Fechack Check My Work 1. Operating income divided by sales quals profit margin. Sales divided by invested assets equals investment Turnover, Multiply these two percentages for the rate of return 2. Prepare condensed estimated income statements and compute the wested assets for each proposal Amazing Rides Inc. Jet Ski Division let Ski Division Investimet ROI OMW L. Operating income dividet ly sales malprofit margin. Sales divided by investissets equal ten turnover Multiply the two percentages for the rate of return 2. Prepare condensed estimated income statements and compute the invested assets for each proposal Amazing Rides Inc Jet Ski Division Estimated Income Statements For the Year Ended December 31, 2012 Proposal 1 Proposal 2 Proposal Sales Cost of goods sold Gross profit Operating expenses Operating income Invested as Check My Work 2. For each proposal, subtract operating expenses from gross profit. Consider increase or decrease in and compute the invested assets accordingly. 3. Using the DuPont formula for return on investment, determine the profit margmestment turnover, and retum on vistment for each proposal Round interim calculations (including previously calculated and final answer tone decimal place Profit margin Investment turnover ROI Proposal Proposal 2: Proposal 4. Select whether each of the three proposals would meet the required 19.5% return on investment Proposal 1: No Proposal 2: No Proposal 3: Yes 5. The Jet Sko Division were in an industry where the profit margin could not be increased, how much would the investment over have to increase to meet the president's required 19.5% return on investment Band intermediate calculations to two decimal places and your firal anwer to one decimal place
