Chapter 24 Evaluating Decentralized Operations 1245 Using the DuPont formula for return on investment, compute the profit margin, investment turnover, and return on investment for each division. Round percentages and the investment turnover to one decimal place. - If available funds permit the expansion of operations of only one division, which of the divisions would you recommend for expansion, based on parts (1) and (2)? Explain 'R 24-4A Effect of proposals on divisional performance Obj. 4 condensed income statement for the Commercial Division of Maxell Manufacturing Inc. for the rear ended December 31, 2099, is as follows: Sales $3,500,000 Cost of goods sold (2.480.000) Gross profit $ 1.020,000 Operating expenses (600,000 Operating income $ 420,000 Invested assets $ 2,500,000 Assume that the Commercial Division received no allocations from support departments. The president of Maxell Manufacturing has indicated that the division's return on a $2,500,000 invest ment 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 depre- ciation 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. 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. 1. 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 president's required 21% return on investment? PR 24-5A Divisional performance analysis and evaluation Obj. 4 The vice president of operations of Recycling Industries is evaluating the performance of two divisions organized as investment centers. Invested assets and condensed income statement date For the past year for each division are as follows: Business Division Consumer Division Sales $42,800,000 $56,000,000 Cost of goods sold 23,500,000 30,500,000 Operating expenses 11,424,800 14,300,000 Invested assets 34,240,000 70,000,000