Question

A condensed income statement for the Commercial Division of Maxell Manufacturing Inc. for the year ended December 31, 20Y9, is as follows:

Sales	$3,500,000
Cost of goods sold	(2,480,000)
Gross profit	$1,020,000
Operating expenses	(600,000)
Operating income	$420,000
Invested assets	$2,500,000

Assume that the Commercial Division received no allocations from support 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 two decimal place.

	Commercial Division
Profit margin	fill in the blank 2b0c4601d075049_1	%
Investment turnover	fill in the blank 2b0c4601d075049_2
ROI	fill in the blank 2b0c4601d075049_3	%

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1. To analyze differences in the return on investment across division, the DuPont formula is used. The DuPont formula views the return on investment as the product of the profit margin and the investment turnover.

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

Maxell Manufacturing Inc.—Commercial Division
Estimated Income Statements
For the Year Ended December 31, 20Y9
	Proposal 1	Proposal 2	Proposal 3
Sales	$fill in the blank 1df4f7feffdc021_1	$fill in the blank 1df4f7feffdc021_2	$fill in the blank 1df4f7feffdc021_3
Cost of goods sold	fill in the blank 1df4f7feffdc021_4	fill in the blank 1df4f7feffdc021_5	fill in the blank 1df4f7feffdc021_6
Gross profit	$fill in the blank 1df4f7feffdc021_7	$fill in the blank 1df4f7feffdc021_8	$fill in the blank 1df4f7feffdc021_9
Operating expenses	fill in the blank 1df4f7feffdc021_10	fill in the blank 1df4f7feffdc021_11	fill in the blank 1df4f7feffdc021_12
Operating income	$fill in the blank 1df4f7feffdc021_13	$fill in the blank 1df4f7feffdc021_14	$fill in the blank 1df4f7feffdc021_15
Invested assets	$fill in the blank 1df4f7feffdc021_16	$fill in the blank 1df4f7feffdc021_17	$fill in the blank 1df4f7feffdc021_18

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2. Calculate the cost of goods sold and the amount of invested assets for each proposal using the information provided. For proposal 3, compute the amount of sales and operating expenses using the information provided.

3. 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.

Proposal	Profit margin	Investment turnover	ROI
Proposal 1	fill in the blank 41d2df0befce01b_1 %	fill in the blank 41d2df0befce01b_2	fill in the blank 41d2df0befce01b_3 %
Proposal 2	fill in the blank 41d2df0befce01b_4 %	fill in the blank 41d2df0befce01b_5	fill in the blank 41d2df0befce01b_6 %
Proposal 3	fill in the blank 41d2df0befce01b_7 %	fill in the blank 41d2df0befce01b_8	fill in the blank 41d2df0befce01b_9 %

Answer 1

​​​​​​Maxell manufacturing Inc.

1). Return on investment = profit margin * investment turnover   

commercial department :

ROI. = ($420,000/$3,500,000) *($3,500,000/$2,500,000)

= 12% * 1.40

= 16.8%

2). Estimated income statements for the year ended December31,2019

	Proposal 1	proposal 2	proposal 3
Sales	3,500,000	3,500,000	2,905,000
Cost of goods sold	2,585,000	1,920,000	2,073,300
Gross profit	915,000	1,580,000	831,700
Operating expenses	600,000	600,000	425,000
Income from operations	315,000	980,000	406,700
Invested assets	2,187,500	4,375,000	1,162,000

2480000 + 105,000 = 2,585,000

2,500,000 - 312,500 = 2,187,500

2,480,000 - 560,000 = 1,920,000

2,500,000 + 1875,000 = 4,375,000

3,500,000 - 595,000 = 2,905,000

2,480,000 - 406,700. = 2,073,300

600,000. - 175,000. = 425,000

2,500,000 - 1,338,000 = 1,162,000

3).

proposal 1:

Commercial division ROI =

(315,000/3,500,000) * (3,500,000/2,187,500)

= 9% * 1.60. = 14.40%

proposal 2:

commercial division ROI =

(980,000/3,500,000) * (3,500,000/4,375,000)

= 28% * 0.8. = 22.40%

proposal 3:

Commercial dividend ROI=

(406,700/2,905,000) * (2,905,000/1,162,000)

= 14% * 2.5 = 35%

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