Effect of Proposals on Divisional Performance A condensed income statement for the Jet 5ki Division of Amazing Rides Inc, for the year ended December 31 , 20Y2, is as follows: Assume that the Jet Skid Division received no charges from service departments. The president of Amazing Rides has indicated that the division's rate of return on a 52,800,000 investiment must be increased to at least 13% by the end of the next year if operations are to continue. The divislon manager is considering the following three proposals: Proposal 1: Transfer equipment with a book value of $560,000 to other divislons at no gain or loss and lesse similar equipment. The annual lease pavments would exceed the amount of depreciation expense on the old equipment by 5100,800 . 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 etficient machining equipment and thereby reduce the cost of goods sold by 5369 , 600 , 5 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 s1,400,000 for the year: Proposal 3: Reduce invested assets by discontinuing the tandem jet sut line. This action would eliminate sales of $595,000, cost of goods sold of $397,600, and coperating expenses of $175,000. Assets of $1,417,600 would be tansferred to oeher divisions at no gon or loss. Required: 1. Using the Oupont formula for retum on igvestmens, detertnine the profit margin, investment turnover, and return on itivestment for the Jet ski Division for the past Yeari For investment tumover and Rot, round to one decimal place. t cha Ny Was 1. Operating income divided by saies equals proft itargin. Sales dinided by invested assets equals invertment turnoves. Muliply thete two percentages for the rake of ieturn. 2. Prepare condensed estimated income statements and compute the invested assets for each proposal. Amazing Rides Inc.-Jet Ski Division Estimated Income Statements 3. Using the Dupont formula for return on investment, determine the profit margin, investment turnover, and return on investment for each proposal. Roun calculations (including previously calculated) and final answer to one decimal place. 4. Select whether each of the three proposals would meet the required 13% return on investment. 5. If the Jet 5ki 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 13%, return on imvestment? Round intermediate calculations to two decimal places and your final answer to one decimal pisce. of TOuck Uy won 3. Operating income divided by sales equals profic margin. Sales divided by invested assets equals investment furnover, Multiply these two percentages for the rate of return. 4. Compare the results for all proposals. 5. Divide the return on investment by the profit margin
