Elfect 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: Assime that the Commercial Division received no allocations from support departments. The president of Maxell Manufacturing has indicated that the divisionis return on a $2,500,000 investrnent 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 fease payments would exceed the amount of degreciation expense on the old equipment by $105,000. This increase in expense would be included as part of the cost of goods sold. 5 ales 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 depredation 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. Thes 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: 1. Using the Dupont formula for return on investment, determine the profit margin, investment turnover, and return on investment for the Commercial Dhision for. the past year. If required, round your answers to two decinal place. 2. Prepare condensed estimated income statements and compute the invested assets for each proposal. Maxelt Manufocturing Inc.-Commercial Division Estimated Income Statements For the Year Ended Doramhar a1 zavo rekiteck resed vy wok 3. Using the DuPont formula for return on imvestment, determine the profit margin. invostment turnover, and return on imvestment for alach proposal, Round the investment turnover and return on investment to one decimal place. 3. Using the Dupont formula for return on investment, determine the profit maroin, investment turnover, and retum on investment for each proposal. Round thet investment turnover and return on investment to one decimal place. 4. Which of the three proposals would meet the required 21% return on investment? 5. If the Commercial Division were in an industry where the profit maroin 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 tuenover answer as a percentage of current investment turnover Round interim calculations (including previously calculated) and final answer to one decimal place. F check My Whik 3. and 4. The return on investment is the product of the profit margin and investment tamovec. Compare your answers to the required 21 eh return. 5. Set up the formula for return on imvestment, folve for the required investment turnover. Compare the required investruent tumover to the current investment turnover to determine the increase. Divide the increase by the current investment turnover to voxpress as a percentage
