Effect of Proposals on Divisional Performance A condensed income statement for the Electronics Division of Gihbll Industries Inc. for the year ended December 31, 2099, is as follows: $1,575,000 (891,000) $684,000 Sales Cost of goods sold Gross profit Operating expenses Operating income Invested assets (558,000) $126,000 $1,050,000 Assume that the Electronics Division received no allocations from support departments. The president of Gibbli 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 tease 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. 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 10 % 2,10 21 % Proposal 2 9.00 % 1.5 13.4 X % Proposal 3 20.00 % 0.80 16 % 4. Which of the three proposals would meet the required 20% return on investment? Proposal 1 Proposal 2 Meets Does not meet Does not meet Proposal 3