ACCT 202 Study Guide - Final Guide: Gross Profit, Profit Margin, Income Statement
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Effect of Proposals on Divisional Performance
A condensed income statement for the Golf Division of RewindSports Inc. for the year ended December 31, 2016, is asfollows:
Sales | $3,360,000 |
Cost of goods sold | 2,408,800 |
Gross profit | $ 951,200 |
Operating expenses | 548,000 |
Income from operations | $ 403,200 |
Invested assets | $2,400,000 |
Assume that the Golf Division received no charges from servicedepartments. The president of Rewind Sports has indicated that thedivision's rate of return on a $2,400,000 investment must beincreased to at least 20.4% by the end of the next year ifoperations are to continue. The division manager is considering thefollowing three proposals:
Proposal 1: Transfer equipment with a book value of$480,000 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 $86,400. This increasein expense would be included as part of the cost of goods sold.Sales would remain unchanged.
Proposal 2: Purchase new and more efficient machiningequipment and thereby reduce the cost of goods sold by $316,800after 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 $1,200,000 for the year.
Proposal 3: Reduce invested assets by discontinuing aproduct line. This action would eliminate sales of $510,000, costof goods sold of $340,800, and operating expenses of $150,000.Assets of $1,215,100 would be transferred to other divisions at nogain or loss.
Required:
1. Using the DuPont formula for rate of returnon investment, determine the profit margin, investment turnover,and rate of return on investment for the Golf Division for the pastyear. Round your answers to one decimal place.
Golf Division | ||
Profit margin | % | |
Investment turnover | ||
ROI | % |
2. Prepare condensed estimated incomestatements and compute the invested assets for each proposal.
Rewind SportsInc.-Golf Division | |||
EstimatedIncome Statements | |||
For the YearEnded December 31, 2016 | |||
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 rate of returnon investment, determine the profit margin, investment turnover,and rate of return on investment for each proposal. Round youranswers to one decimal place.
Profit Margin | Investment Turnover | ROI | |
Proposal 1 | % | % | |
Proposal 2 | % | % | |
Proposal 3 | % | % |
4. Select whether each of the three proposalswould meet the required 20.4% rate of return on investment.
Proposal 1 | |
Proposal 2 | |
Proposal 3 |
5. If the Golf Division were in an industrywhere the profit margin could not be increased, how much would theinvestment turnover have to increase to meet the president'srequired 20.4% rate of return on investment? Enter your increase ininvestment turnover answer as a percentage of current investmentturnover. If required, round your answer to one decimal place.
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.
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The Crunchy Granola Company is a diversified food company thatspecializes in all natural foods. The company has three operatingdivisions organized as investment centers. Condensed data takenfrom the records of the three divisions for the year ended June 30,2016, are as follows:
Cereal Division | Snack Cake Division | Retail Bakeries Division | |
---|---|---|---|
Sales | $25,900,000 | $8,000,000 | $9,950,000 |
Cost of goods sold | 16,610,000 | 5,590,000 | 6,725,000 |
Operating expenses | 7,218,000 | 1,610,000 | 2,429,000 |
Invested assets | 10,360,000 | 2,666,667 | 6,633,333 |
The management of The Crunchy Granola Company is evaluating eachdivision as a basis for planning a future expansion ofoperations.
Required: | |
1. | Prepare condensed divisional income statements for the threedivisions, assuming that there were no service departmentcharges. |
2. | Using the DuPont formula for rate of return on investment,compute the profit margin, investment turnover, and rate of returnon investment for each division. If required, round your finalanswer to one decimal place. |
3. | If available funds permit the expansion of operations of onlyone division, which of the divisions would you recommend forexpansion? |