Effect of Proposals on Divisional Performance A condensed income statement for the Electronics Division of Gihbli Industries Inc. for the year ended December 31 is as follows: Sales $2,800,000 2,205,000 Cost of goods sold Gross profit $ 595,000 Operating expenses 343,000 Income from operations $ 252,000 Invested assets $2,000,000 Assume that the Electronics Division received no cost allocations from service departments. The president of Gihbli Industries Inc. has indicated that the division's return on a $2,000,000 investment must be increased to at least 14.4% 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 $400,000 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 $72,000. 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 $425,000, reduce cost of goods sold by $284,000, and reduce operating expenses by $125,000. Assets of $1,012,600 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 $264,000 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 $1,000,000 for the year. Required: 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. Round your answers to one decimal place. Electronics Division Profit margin % Investment turnover ROI % 2. Prepare condensed estimated income statements and compute the invested assets for each proposal. Gihbli Industries Inc.-Electronics Division Estimated Income Statements For the Year Ended December 31 Proposal 1 Proposal 2 Proposal 3 Sales Cost of goods sold Gross profit $ $ Operating expenses Income from operations $ Invested assets 3. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for each proposal. Round interim calculations (including previously calculated) and final answer to one decimal place. Proposal Profit Margin Investment Turnover ROI Proposal 1 % % Proposal 2. % % Proposal 3 % % 4. Which of the three proposals would meet the required 14.4% return on investment. Proposal 1 Proposal 2 Proposal 3 5. 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 14.4% 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. %
