A condensed income statement for the Commercial Division of Maxell Manufacturing Inc. for the year ended December 31 is as follows: Sales $3,500,000 Cost of goods sold 2,480,000 Gross profit $1,020,000 Operating expenses 600,000 Income from operations $420,000 Invested assets $2,500,000 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 $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. Required: 1. 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. If required, round your answers to one decimal place. Commercial Division Profit margin fill in the blank % Investment turnover fill in the blank ROI fill in the blank % 2. Prepare condensed estimated income statements and compute the invested assets for each proposal. Maxell Manufacturing Inc.-Commercial DivisionEstimated Income StatementsFor the Year Ended December 31 Proposal 1 Proposal 2 Proposal 3 Sales $fill in the blank $fill in the blank $fill in the blank Cost of goods sold fill in the blank fill in the blank fill in the blank Gross profit $fill in the blank $fill in the blank $fill in the blank Operating expenses fill in the blank fill in the blank fill in the blank Income from operations $fill in the blank $fill in the blank $fill in the blank Invested assets $fill in the blank $fill in the blank $fill in the blank 3. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for each proposal. Round investment turnover and percentages to one decimal place. Proposal Profit margin Investment turnover ROI Proposal 1 fill in the blank % fill in the blank fill in the blank % Proposal 2 fill in the blank % fill in the blank fill in the blank % Proposal 3 fill in the blank % fill in the blank fill in the blank % 4. Which of the three proposals would meet the required 21% return on investment?

A condensed income statement for the Commercial Division of Maxell Manufacturing Inc. for the year ended December 31 is as follows: Sales $3,500,000 Cost of goods sold 2,480,000 Gross profit $1,020,000 Operating expenses 600,000 Income from operations $420,000 Invested assets $2,500,000 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 $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. Required: 1. 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. If required, round your answers to one decimal place. Commercial Division Profit margin fill in the blank % Investment turnover fill in the blank ROI fill in the blank % 2. Prepare condensed estimated income statements and compute the invested assets for each proposal. Maxell Manufacturing Inc.-Commercial DivisionEstimated Income StatementsFor the Year Ended December 31 Proposal 1 Proposal 2 Proposal 3 Sales $fill in the blank $fill in the blank $fill in the blank Cost of goods sold fill in the blank fill in the blank fill in the blank Gross profit $fill in the blank $fill in the blank $fill in the blank Operating expenses fill in the blank fill in the blank fill in the blank Income from operations $fill in the blank $fill in the blank $fill in the blank Invested assets $fill in the blank $fill in the blank $fill in the blank 3. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for each proposal. Round investment turnover and percentages to one decimal place. Proposal Profit margin Investment turnover ROI Proposal 1 fill in the blank % fill in the blank fill in the blank % Proposal 2 fill in the blank % fill in the blank fill in the blank % Proposal 3 fill in the blank % fill in the blank fill in the blank % 4. Which of the three proposals would meet the required 21% return on investment?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Effect of Proposals on Divisional Performance

A condensed income statement for the Commercial Division of Maxell Manufacturing Inc. for the year ended December 31 is as follows:

Sales	$3,500,000
Cost of goods sold	2,480,000
Gross profit	$1,020,000
Operating expenses	600,000
Income from operations	$420,000
Invested assets	$2,500,000

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 $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.

Required:

1. 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. If required, round your answers to one decimal place.

	Commercial Division
Profit margin	fill in the blank %
Investment turnover	fill in the blank
ROI	fill in the blank %

2. Prepare condensed estimated income statements and compute the invested assets for each proposal.

Maxell Manufacturing Inc.-Commercial DivisionEstimated Income StatementsFor the Year Ended December 31

	Proposal 1	Proposal 2	Proposal 3
Sales	$fill in the blank	$fill in the blank	$fill in the blank
Cost of goods sold	fill in the blank	fill in the blank	fill in the blank
Gross profit	$fill in the blank	$fill in the blank	$fill in the blank
Operating expenses	fill in the blank	fill in the blank	fill in the blank
Income from operations	$fill in the blank	$fill in the blank	$fill in the blank
Invested assets	$fill in the blank	$fill in the blank	$fill in the blank

3. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for each proposal. Round investment turnover and percentages to one decimal place.

Proposal	Profit margin	Investment turnover	ROI
Proposal 1	fill in the blank %	fill in the blank	fill in the blank %
Proposal 2	fill in the blank %	fill in the blank	fill in the blank %
Proposal 3	fill in the blank %	fill in the blank	fill in the blank %

4. Which of the three proposals would meet the required 21% return on investment?

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