Question

In: Accounting

Effect of Proposals on Divisional Performance A condensed income statement for the Electronics Division of Gihbli...

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 $4,030,000
Cost of goods sold 2,983,700
Gross profit $ 1,046,300
Operating expenses 603,000
Income from operations $ 443,300
Invested assets $3,100,000

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

The president of Gihbli Industries Inc. has indicated that the division’s return on a $3,100,000 investment must be increased to at least 16.5% 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 $620,000 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 $111,600. 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 $658,800, reduce cost of goods sold by $440,200, and reduce operating expenses by $193,800. Assets of $1,569,500 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 $409,200 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 $1,550,000 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 %
Investment turnover
ROI %

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 $ $ $
Cost of goods sold
Gross profit $ $ $
Operating expenses
Income from operations $ $ $
Invested assets $ $ $

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 % %
Proposal 2 % %
Proposal 3 % %

4. Which of the three proposals would meet the required 16.5% return on investment.

Proposal 1 Meets
Proposal 2 Meets
Proposal 3 Meets

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 16.5% 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.
%

Solutions

Expert Solution

Solution 1:

Profit margin for past year = Net operating income / Sales = $443,300 / $4,030,000 = 11%

Investment turnover for past year = Sales / Average operating assets = $4,030,000 / $3,100,000 = 1.3 times

ROI = Margin * Turnover = 11% * 1.30 = 14.30%

Solution 2:

Gihbli Industries Inc.
Estimated income statement
For the year ended December 31, 20Y9
Particulars Proposal 1 Proposal 2 Proposal 3
Sales $4,030,000.00 $3,371,200.00 $4,030,000.00
Cost of goods sold $2,872,100.00 $2,543,500.00 $2,574,500.00
Gross Profit $1,157,900.00 $827,700.00 $1,455,500.00
Operating expenses $603,000.00 $409,200.00 $603,000.00
Income from operations $554,900.00 $418,500.00 $852,500.00
Invested assets $2,480,000.00 $1,530,500.00 $4,650,000.00

Solution 3:

Computation of Profit Margin, Investment Turnover and ROI for each proposal
Particulars Proposal 1 Proposal 2 Proposal 3
Sales $4,030,000.00 $3,371,200.00 $4,030,000.00
Income from operations $554,900.00 $418,500.00 $852,500.00
Invested assets $2,480,000.00 $1,530,500.00 $4,650,000.00
Profit Margin (Net Operating income / Sales) 13.8% 12.4% 21.2%
Investment Turnover (Sales / Invested Assets) 1.6 2.2 0.9
ROI (Margin * Turnover) 22.4% 27.3% 18.3%

Solution 4:

All 3 proposals meets the required 16.5% return on investment.

Solution 5:

Existing profit margin = 11%

If profit margin could not be increased then required investment turnover to meet required return = 16.5 / 11 = 1.5 times

Current investment turnover = 1.3 times

Increase in investment turnvoer = 1.5 - 1.3 = 0.2

% increase in investment turnover = 0.2 / 1.3 = 15.4%


Related Solutions

Effect of Proposals on Divisional Performance A condensed income statement for the Electronics Division of Gihbli...
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 $3,770,000 Cost of goods sold 2,435,500 Gross profit $ 1,334,500 Operating expenses 769,000 Income from operations $ 565,500 Invested assets $2,900,000 Assume that the Electronics Division received no charges from service departments. The president of Gihbli Industries Inc. has indicated that the division’s return on a $2,900,000 investment must be increased...
Effect of Proposals on Divisional Performance A condensed income statement for the Electronics Division of Gihbli...
Effect of Proposals on Divisional Performance A condensed income statement for the Electronics Division of Gihbli Industries Inc. for the year ended December 31 is as follows: Sales $3,190,000 Cost of goods sold 2,362,100 Gross profit $ 827,900 Operating expenses 477,000 Income from operations $ 350,900 Invested assets $2,900,000 Assume that the Electronics Division received no charges from service departments. The president of Gihbli Industries Inc. has indicated that the division’s return on a $2,900,000 investment must be increased to...
Effect of Proposals on Divisional Performance A condensed income statement for the Electronics Division of Gihbli...
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 $1,575,000 Cost of goods sold 891,000 Gross profit $684,000 Operating expenses 558,000 Income from operations $126,000 Invested assets $1,050,000 Assume that the Electronics Division received no charges from service departments. The president of Gihbli Industries Inc. has indicated that the division's return on a $1,050,000 investment must be increased to at...
Effect of Proposals on Divisional Performance A condensed income statement for the Electronics Division of Gihbli...
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 $3,640,000 Cost of goods sold 2,781,000 Gross profit $ 859,000 Operating expenses 495,000 Income from operations $ 364,000 Invested assets $2,600,000 Assume that the Electronics Division received no charges from service departments. The president of Gihbli Industries Inc. has indicated that the division’s return on a $2,600,000 investment must be increased...
Effect of Proposals on Divisional Performance A condensed income statement for the Electronics Division of Gihbli...
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 $4,030,000 Cost of goods sold 2,983,700 Gross profit $ 1,046,300 Operating expenses 603,000 Income from operations $ 443,300 Invested assets $3,100,000 Assume that the Electronics Division received no charges from service departments. The president of Gihbli Industries Inc. has indicated that the division’s return on a $3,100,000 investment must be increased...
Effect of Proposals on Divisional Performance A condensed income statement for the Jet Ski Division of...
Effect of Proposals on Divisional Performance A condensed income statement for the Jet Ski Division of Amazing Rides Inc. for the year ended December 31, 20Y2, is as follows: Sales $3,850,000 Cost of goods sold (2,668,500) Gross profit $ 1,181,500 Operating expenses (681,000) Operating income $ 500,500 Invested assets $3,500,000 Assume that the Jet Ski Division received no charges from service departments. The president of Amazing Rides has indicated that the division’s rate of return on a $3,500,000 investment must...
eBookCalculator Effect of Proposals on Divisional Performance A condensed income statement for the Jet Ski Division...
eBookCalculator Effect of Proposals on Divisional Performance A condensed income statement for the Jet Ski Division of Amazing Rides Inc. for the year ended December 31, 20Y2, is as follows: Sales $3,720,000 Cost of goods sold (2,666,600) Gross profit $ 1,053,400 Operating expenses (607,000) Operating income $ 446,400 Invested assets $3,100,000 Assume that the Jet Ski Division received no charges from service departments. The president of Amazing Rides has indicated that the division’s rate of return on a $3,100,000 investment...
The condensed income statement for the Consumer Products Division of Fargo Industries Inc. is as follows...
The condensed income statement for the Consumer Products Division of Fargo Industries Inc. is as follows (assuming no service department charges): Sales $1,008,000 Cost of goods sold 453,600 Gross profit $554,400 Administrative expenses 201,600 Income from operations $352,800 The manager of the Consumer Products Division is considering ways to increase the return on investment. a. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment of the Consumer Products Division, assuming that...
A condensed income statement for the Commercial Division of Maxell Manufacturing Inc. for the year ended...
A condensed income statement for the Commercial Division of Maxell Manufacturing Inc. for the year ended December 31, 20Y9, is as follows: 1 Sales $3,900,000.00 2 Cost of goods sold 2,505,000.00 3 Gross profit $1,395,000.00 4 Operating expenses 888,000.00 5 Income from operations $507,000.00 6 Invested assets $3,250,000.00 Assume that the Commercial Division received no charges from service departments. The president of Maxell Manufacturing has indicated that the division’s return on a $3,250,000 investment must be increased to at least...
Best Buy Co, Inc., is a leading retailer specializing in consumer electronics. A condensed income statement...
Best Buy Co, Inc., is a leading retailer specializing in consumer electronics. A condensed income statement and balance sheet for the fiscal year ended January 28, 2017, are shown below. Best Buy Co, Inc. Balance Sheet At January 28, 2017 ($ in millions) Assets Current assets: Cash and cash equivalents $ 2,240 Short-term investments 1,681 Accounts receivable (net) 1,347 Inventory 4,864 Other current assets 384 Total current assets 10,516 Long-term assets 3,340 Total assets $ 13,856 Liabilities and Shareholders’ Equity...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT