Effect of proposals on divisional performance

A condensed income statement for the Commercial Division of Maxell Manufacturing Inc. for the year ended December $31,20$Y$9,$ is as follows:

Line Item Description Amount

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$ investment 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 $$312,500$ to other divisions at no gain or loss and lease similar equipment. The annual lease payments would exceed the amount of depreciation expense on the old equipment by $$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.

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 Commercial Division for the past year. If required, round your answers to two decimal place.

Line Item Description Commercial 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 $3$

$\%$

Question Content Area

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

Maxell Manufacturing Inc.$$Commercial Division

Estimated Income Statements

For the Year Ended December $31,20$Y$9$

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

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 the investment turnover and return on investment 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 $9$

$\%$

$4.$ Which of the three proposals would meet the required $21\%$ return on investment?

Proposal Answer

Proposal $1$

Proposal $2$

Proposal $3$

$5.$ 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? 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.

fill in the blank $1$ of $1$

$\%$