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:

Sales	$4,290,000
Cost of goods sold	2,872,400
Gross profit	$ 1,417,600
Operating expenses	817,000
Income from operations	$ 600,600
Invested assets	$3,300,000

Assume that the Electronics Division received no charges from service departments.

The president of Gihbli Industries Inc. has indicated that the divisions return on a $3,300,000 investment must be increased to at least 22.4% 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 $660,000 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 $118,800. 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 $701,300, reduce cost of goods sold by $468,600, and reduce operating expenses by $206,300. Assets of $1,670,800 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 $435,600 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 $1,650,000 for the year.

Required:

1. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and rate of return on investment for the Electronics Division for the past year. Round your answers to one decimal place.

	Electronics Division
Profit margin	fill in the blank 2ae551f5807801a_1	%
Investment turnover	fill in the blank 2ae551f5807801a_2
ROI	fill in the blank 2ae551f5807801a_3	%

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1. Income from operations divided by sales equals profit margin. Sales divided by invested assets equals investment turnover. Multiply these two values for the rate of return on investment.

Learning Objective 4.

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, 20Y9

	Proposal 1	Proposal 2	Proposal 3
Sales	$fill in the blank 964ea407a01a01a_1	$fill in the blank 964ea407a01a01a_2	$fill in the blank 964ea407a01a01a_3
Cost of goods sold	fill in the blank 964ea407a01a01a_4	fill in the blank 964ea407a01a01a_5	fill in the blank 964ea407a01a01a_6
Gross profit	$fill in the blank 964ea407a01a01a_7	$fill in the blank 964ea407a01a01a_8	$fill in the blank 964ea407a01a01a_9
Operating expenses	fill in the blank 964ea407a01a01a_10	fill in the blank 964ea407a01a01a_11	fill in the blank 964ea407a01a01a_12
Income from operations	$fill in the blank 964ea407a01a01a_13	$fill in the blank 964ea407a01a01a_14	$fill in the blank 964ea407a01a01a_15
Invested assets	$fill in the blank 964ea407a01a01a_16	$fill in the blank 964ea407a01a01a_17	$fill in the blank 964ea407a01a01a_18

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

Learning Objective 4.

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

Proposal	Profit Margin	Investment Turnover	ROI
Proposal 1	fill in the blank 7b6a6407905a04e_1 %	fill in the blank 7b6a6407905a04e_2	fill in the blank 7b6a6407905a04e_3 %
Proposal 2	fill in the blank 7b6a6407905a04e_4 %	fill in the blank 7b6a6407905a04e_5	fill in the blank 7b6a6407905a04e_6 %
Proposal 3	fill in the blank 7b6a6407905a04e_7 %	fill in the blank 7b6a6407905a04e_8	fill in the blank 7b6a6407905a04e_9 %

4. Which of the three proposals would meet the required 22.4% return on investment.

Proposal 1	MeetsDoes not meetMeets
Proposal 2	MeetsDoes not meetMeets
Proposal 3	MeetsDoes not meetDoes not meet

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 22.4% rate of return on investment? Enter your increase in investment turnover answer as a percentage of current investment turnover. If required, round your answer to one decimal place. fill in the blank 7b6a6407905a04e_13 %

with explanation