A condensed income statement for the Electronics Division of Gihbli Industries I

Question

A condensed income statement for the Electronics Division of Gihbli Industries Inc. for the year ended December 31 is as follows: $2,380,000 1,649,600 $ 730,400 421,000 $309,400 $1,700,000 Assume that the Electronics Division received no charges from service departments Sales Cost of goods sold Gross profit Operating expenses Income from operations Invested assets The president of Gihbli Industries Inc. has indicated that the division's return on a $1,700,000 investment must be increased to at least 20.8% by the end o 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 $340,000 to other divisions at no gain or loss and lease similar equipment. The annual lease payments would be less than the amount of depreciation expense on the old equipment by $61,200. This decrease in expense would be included as part of the cost of goods sold. Sales would remain unchanged Proposal 2: Reduce invested assets by discontinuing a product line. This action would eliminate sales of $361,300, reduce cost of goods sold by $241,400, and reduce operating expenses by $106,300. Assets of $860,700 would be transferred to other divisions at no gain or loss. Proposal 3: Purchase new and more efficient machinery and thereby reduce the cost of goods sold by $224,400 after considering the effects of depredation expense on the new equipment. Sales would remain unchanged, and the old machinery, which has no remaining book value, would be scrapped at no gain or loss. The new machinery would increase invested assets by $850,000 for the year Required: PrevinnS

Explanation / Answer

Profit Margin(%)= Investment Turnover X Return on Investment

= 1.4 X 18.2

= 25.5%

Investment Turnover= Total Turnover / Total Investment

= 2380000 / 1700000

= 1.4 times

Return on Investment (%) = Net Income / Total Investment

= 309400/1700000

= 18.2%

2. Gihbli Industries Inc. Electronics Division

Estimated Income Statements

For the year ended December 31

Proposal I

Proposal II

Proposal III

Sales

$

2380000

$

2018700

$

2380000

Cost of goods sold

1588400

1408200

1425200

Gross Profit

$

791600

$

610500

$

954800

Operating expenses

421000

314700

421000

Income from the operations

$

370600

$

295800

$

533800

Investment assets

1360000

839300

2550000

                 

3. For proposal I and III, there was no information of Operating expenses, hence current value was considered.

Proposal

Profit Margin(%)

Investment Turnover

ROI(%)

Proposal 1

47.7

1.8

27.3

Proposal 2

84.8

2.4

35.2

Proposal 3

19.5

0.9

20.9

4. All three proposals were meeting the required 20.8% return of income.

5. Current investment turnover and return on investment are 1.4 and 18.2% respectively.

Expected Investment turnover for required ROI of 20.8% = 1.4 X 20.8 / (18.2)

= 1.6 times

Increase in percent of Investment turnover = 0.2/1.4 X (100) = 14.3%

2. Gihbli Industries Inc. Electronics Division

Estimated Income Statements

For the year ended December 31

Proposal I

Proposal II

Proposal III

Sales

$

2380000

$

2018700

$

2380000

Cost of goods sold

1588400

1408200

1425200

Gross Profit

$

791600

$

610500

$

954800

Operating expenses

421000

314700

421000

Income from the operations

$

370600

$

295800

$

533800

Investment assets

1360000

839300

2550000

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.