Effect of proposals on divisional performance A condensed income statement for the Commercial Division of Maxell Manufacturing inc, for the year ended December 31 , 20Y9, is as follows: 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 12,500,000 investment must be increased to at least 21 by by the end of the next year if operations are to continue. The division manager is considering the following three proposals: Progosal f: 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 depreciabion expense on the old equipment by $105,000. This increase in expense would be included as aart 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 soid by $560,000 after considering the effects of depreeiation 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 equilmment would increase invested assets by an additional $1,875,000 for the year: Proporal 3: Reduce invested assets by discontinuing a product line. This action would eliminate sales of $595,000, reduce cost of goods sold by s406,700, and reduce. operating expenses by $175,000. Assets of $1,338,000 would be transferred to other divisions at no gain or foss. 1. Using the Dupont fommula for retum on investment, determine the profit margin, investment turnover, and retum on investment for the Commerciat Division for the past year, If required, round your answers to two decimal place. 2. Prepare condensed estimated income statements and compute the invested assets for esch proposal. Maxell Manufacturing Inc.-Commercial Division Estimated Income Statements 3. Using the Dupont formula for return on investment, determine the profit margin, investment tumover, and retum on investment for each proposal, Round the investment turnover and return on investment to one decimal place. 4. Which of the three proposals would meet the required 21 W roturn on investment? 5. If the Commercial Division were in an industry where the profic margin could not be increasod, how much would the imvestment furnover have to increase to meet the president's required 21% retum on imvestment? 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
