1. A condensed income statement for the Commercial Division of McLean Manufacturing Inc. for the year ended December 31, 2020, is as follows: Category Sales Cost of goods sold Gross profit Operating expenses Income from operations Invested assets Dollar Amount $3,600,000 2,450,000 1,150,000 600,000 550,000 2,500,000

FINANCIAL ACCOUNTING
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Chapter1: Financial Statements And Business Decisions
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Problem 1 Instructions
a. Using the DuPont formula for return on investment, determine the profit margin,
investment turnover, and return on investment for the Commercial Division for the past
year.
b. Prepare condensed estimated income statements and compute the invested assets for
each proposal.
c. Using the DuPont formula for return on investment, determine the profit margin,
investment turnover, and return on investment for each proposal. (Round the
investment turnover and return on investment to one decimal place.)
e.
d. Which of the three proposals would meet the required 21% return on investment?
If the Commercial 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 21% return on investment?
Transcribed Image Text:Problem 1 Instructions a. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for the Commercial Division for the past year. b. Prepare condensed estimated income statements and compute the invested assets for each proposal. c. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for each proposal. (Round the investment turnover and return on investment to one decimal place.) e. d. Which of the three proposals would meet the required 21% return on investment? If the Commercial 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 21% return on investment?
Problems
1. A condensed income statement for the Commercial Division of McLean Manufacturing Inc. for
the year ended December 31, 2020, is as follows:
Category
Sales
Cost of goods sold
Gross profit
Operating expenses
Income from operations
Invested assets
Dollar Amount
$3,600,000
2,450,000
1,150,000
600,000
550,000
2,500,000
Assume that the Commercial Division received no charges from service departments. The
president of McLean Manufacturing has indicated that the division's return on a $2,500,000
investment 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 lease payments would exceed the amount of
depreciation expense on the old equipment by $105,000. 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 efficient machining equipment and thereby reduce the cost
of goods sold by $560,000 after considering the effects of depreciation 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. This 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.
Transcribed Image Text:Problems 1. A condensed income statement for the Commercial Division of McLean Manufacturing Inc. for the year ended December 31, 2020, is as follows: Category Sales Cost of goods sold Gross profit Operating expenses Income from operations Invested assets Dollar Amount $3,600,000 2,450,000 1,150,000 600,000 550,000 2,500,000 Assume that the Commercial Division received no charges from service departments. The president of McLean Manufacturing has indicated that the division's return on a $2,500,000 investment 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 lease payments would exceed the amount of depreciation expense on the old equipment by $105,000. 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 efficient machining equipment and thereby reduce the cost of goods sold by $560,000 after considering the effects of depreciation 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. This 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.
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