Question

A condensed income statement for the Commercial Division ofMaxell Manufacturing Inc. for the year ended December 31, 2016, isas follows:

1	Sales	$3,850,000.00
2	Cost of goods sold	2,670,000.00
3	Gross profit	$1,180,000.00
4	Operating expenses	795,000.00
5	Income from operations	$385,000.00
6	Invested assets	$2,750,000.00

Assume that the Commercial Division received no charges fromservice departments. The president of Maxell Manufacturing hasindicated that the division’s rate of return on a $2,750,000investment must be increased to at least 18.00% by the end of thenext year if operations are to continue. The division manager isconsidering the following three proposals:

Proposal 1: Transfer equipment with a book value of$315,000 to other divisions at no gain or loss and lease similarequipment. The annual lease payments would exceed the amount ofdepreciation expense on the old equipment by $108,000. Thisincrease in expense would be included as part of the cost of goodssold. Sales would remain unchanged.

Proposal 2: Purchase new and more efficient machiningequipment and thereby reduce the cost of goods sold by $525,000after considering the effects of depreciation expense on the newequipment. Sales would remain unchanged, and the old equipment,which has no remaining book value, would be scrapped at no gain orloss. The new equipment would increase invested assets by anadditional $1,818,000 for the year.

Proposal 3: Reduce invested assets by discontinuing aproduct line. This action would eliminate sales of $594,000, reducecost of goods sold by $407,700, and reduce operating expenses by$178,500. Assets of $1,388,000 would be transferred to otherdivisions at no gain or loss.

Required:

1.

Using the DuPont formula forrate of return on investment, determine the profit margin,investment turnover, and rate of return on investment for theCommercial Division for the past year.*

2.

Prepare condensed estimatedincome statements and compute the invested assets for eachproposal.

3.

Using the DuPont formula forrate of return on investment, determine the profit margin,investment turnover, and rate of return on investment for eachproposal.*

4.

Which of the three proposalswould meet the required 18.00% rate of return oninvestment?

5.

If the Commercial Division werein an industry where the profit margin could not be increased, howmuch would the investment turnover have to increase to meet thepresident’s required 18.00% rate of return on investment? Enteryour increase in investment turnover answer as a percentage ofcurrent investment turnover. Do not round interimcalculations.

* If required, round your answers to one decimalplace.

1. Using the DuPont formula for rate of return on investment,determine the profit margin, investment turnover, and rate ofreturn on investment for the Commercial Division for the past year.If required, round your answers to one decimal place.

	Commercial Division
Profit margin	%
Investment turnover
ROI	%

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

MAXELL MANUFACTURING INC.—COMMERCIAL DIVISION

Estimated Income Statements

For the Year Ended December 31, 2016

1		Proposal 1	Proposal 2	Proposal 3
2	Sales
3	Cost of goods sold
4	Gross profit
5	Operating expenses
6	Income from operations
7	Invested assets

3. Using the DuPont formula for rate of return on investment,determine the profit margin, investment turnover, and rate ofreturn on investment for each proposal. (Note: Ifrequired, round your intermediate and final answers to two decimalplaces.)

	Profit Margin	Investment Turnover	ROI
Proposal 1	%		%
Proposal 2	%		%
Proposal 3	%		%

5. If the Commercial Division were in an industry where theprofit margin could not be increased, how much would the investmentturnover have to increase to meet the president’s required 18.00%rate of return on investment? Enter your increase in investmentturnover answer as a percentage of current investment turnover.(Note: If required, round your intermediate andfinal answers to two decimal places.)

%