Effect of proposals on divisional performance

A condensed income statement for the Electronics Division of Gihbli Industries Inc. for the year ended December 31, 20Y9, is as follows:

Line Item Description	Amount
Sales	$1,575,000
Cost of goods sold	(891,000)
Gross profit	$684,000
Operating expenses	(558,000)
Operating income	$126,000
Invested assets	$1,050,000

Assume that the Electronics Division received no allocations from support 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.

Required:

Question Content Area

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. If required, round your answers to one decimal place.

Line Item Description	Electronics Division
Profit margin	fill in the blank 1 of 3%
Investment turnover	fill in the blank 2 of 3
ROI	fill in the blank 3 of 3%

Feedback Area

Feedback

1. Operating income divided by sales equals profit margin. Sales divided by invested assets equals investment turnover. Multiply these two values for the return on investment.

Question Content Area

2. Prepare condensed estimated income statements and compute the invested assets for each proposal.

Line Item Description	Proposal 1	Proposal 2	Proposal 3
Sales	$Sales	$Sales	$Sales
Cost of goods sold	Cost of goods sold	Cost of goods sold	Cost of goods sold
Gross profit	$Gross profit	$Gross profit	$Gross profit
Operating expenses	Operating expenses	Operating expenses	Operating expenses
Operating income	$Operating income	$Operating income	$Operating income
Invested assets	$Invested assets	$Invested assets	$Invested assets

Feedback Area

Feedback

2. For each proposal, subtract operating expenses from gross profit.

Question Content Area

3. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for each proposal. Round investment turnover and percentages to one decimal place.

Proposal	Profit margin	Investment turnover	ROI
Proposal 1	fill in the blank 1 of 9%	fill in the blank 2 of 9	fill in the blank 3 of 9%
Proposal 2	fill in the blank 4 of 9%	fill in the blank 5 of 9	fill in the blank 6 of 9%
Proposal 3	fill in the blank 7 of 9%	fill in the blank 8 of 9	fill in the blank 9 of 9%

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? Enter your increase in investment turnover answer as a percentage of current investment turnover. Round interim calculations (including previously calculated) and final answer to one decimal place.