II. II Haniwall Industries. manufacturer of prefabricated houses for over 20 years. designated the Orlando Division as an investment center. Selected nancial information from Orlando's 2017 income statement are presented below. Haniwall Industries Orlando Division Selected Financial Information For the Year Ended December 31. 2017 Sales revenue 54.800000 Cost of goods sold 2.650.000 Selling expenses 727.000 Administrative expenses 402.650 Other operating expense 324,350 Interest expense 1 39.200 Tax expense 167.040 In addition. the division reported the Following asset balances for scal year ended Dec 31. 2017: Assets Market Value Book Value Cash $1.210,000 $1.210,000 Accounts receivable 630.000 630.000 Inventory 880,000 880,000 Investment in Checkers Company 750,000 660,000 Land (undeveloped) 1.550.000 1.360.000 Property and equipment, not of depreciation' 1.400.000 1.280.000 ' Accumulated depreciation stood at 5400.000. The division's operating assets employed at December 31. 2017 registered a 5 percent increase over the 2016 year-end balance. The president of Haniwall Industries has indicated that the division's rate of return on investment must be increased to at least 20% by end of the next year if operations are to continue. The division manager considers implementing one of the following proposals at the beginning of 2018: Proposal 1': Reduce invested assets by discontinuing a product line. This action would eliminate sales of $500,000 with gross margin of 35.4% and operating expenses of $40,000. Assets of 5560.000 would be transferred to other divisions at no gain or loss. Proposal 2: Sell equipment with a book value of $1,000,000 to other divisions at no gain or loss and lease similar equipment. The annual lease payments would exceed the amount of depreciation expense on the old equipment by $72,000. This change in expense would be included as part of the cost of goods sold. Proceeds from sold equipment would be used to pay off short-term creditors and thereby reduce interest expense by $36,000. Sales would remain unchanged. Proposal 3: Purchase new and more efcient machinery for $800,000 using cash and thereby reduce the cost of goods sold by $168,000. Sales would remain unchanged, and the old machinery. which has no remaining book value. would be scrapped at no gain or loss. Required: 1. Calculate the following performance measures for the Orlando Division for 2017. a, Return on investment (ROI). expanded into prot margin and investment turnover (6 marks) b. Residual income (3 marks) 2. If the Orlando Division were in an industry where the prot margin could not be increased, how much would the investment turnover have to increase to meet the president's required rate of return on investment? (3 marks) 3. Using the expanded expression for ROI, determine the new overall prot margin. investment turnover. and ROI for each proposal in 2018. Which of the three proposals would meet the required rate of return on investment? (19 marks) [II Following is a budgeted income statement for Dreyfess of Midwest Products, Inc. The division sells 100.000 units to outsiders at $10 each. and 50.000 units to a sister division at $8. Intercompany Sales to Sales to Thomson Outsiders Sales $400,000 $1.000,000 Variable costs 2001000 400,000 Contribution margin $200,000 $600,000 Fixed costs ($300,000, allocated at $2 per unit) 1001000 200:000 Prot 3100:000 S 400:000 Required: 1. Thomson can buy all of its requirements from an outside supplier at $7 per unit and will do so unless Dreyfess meets the $7 price. Dreyfess' manager knows that if he loses the Thomson business. he will not be able to increase sales to outsiders and xed costs will not change. Should he meet the $7 price from the standpoint of (a) the company and (b) Dreyfess? Show supporting computations (3 marks) Dreyfess meets the $7 price. Dreyfess then is offered the opportunity to sell 60,000 units to a chain store at 5? each. The price of the 100.000 units now sold to outsiders will not be affected. However. Dreyfess has capacity of 190,000 units. If Dreyfess cannot ll all of the requirements of Thomson. then Thomson will have to buy all the units outside at $7. Should Dreyfess accept the order. considering {a} the company and {b} Dreyfess? Show supporting computations. {8 marks) Suppose now that Thomson has received the offer from the outside supplier who will provide as many units as Thomson wants to buy at $1 Dreyfess no longer has the opportunity to sell the 60000 units to the chain store. The manager of Dreyfess believes that reducing prices to outsiders could increase those sales greatly. Best estimates are that reducing the price to $9.20 would get sales of 120.000 units: to $8.40, |50.000 units; and to $7.80. \"0.000 units. Capacity is 190,000 units. Dreyfess can sell any amount up to 50,000 units to Thompson. Thompson will buy units from the outside supplier as necessary. What should be done? How many units should Dreyfess sell to outsiders, and how many units should it sell to Thompson at $7? (6 marks)