Answer:
Gihbli Industries Inc.
Electronics Division
a1. Profit margin = 10%
a2. Investment turnover = 1.2
a3. DuPont Return on Investment = 12%
b. Condensed estimated income statements:
Proposal 1 Proposal 2 Proposal 3
Sales $4,080,000 $3,463,700 $4,080,000
Cost of goods sold (3,117-104.4) 3,012,600 2,705,200 2,734,200
Gross profit $1,067,400 $758,500 $1,345,800
Operating expenses 555,000 373,700 555,000
Income from operations $512,400 $384,800 $790,800
Invested assets ($3,400-580) $2,820,000 $1,931,700 $4,850,000
Step-by-step explanation:
a) Data:
Condensed Income Statement for the year ended December 31:
Sales $4,080,000
Cost of goods sold 3,117,000
Gross profit $963,000
Operating expenses 555,000
Income from operations $408,000
Invested assets $3,400,000
Expected Return on Investment = 22.5%
b) Calculations:
Proposal 1 Proposal 2 Proposal 3
Sales $4,080,000 $3,463,700 $4,080,000
Cost of goods sold (3,117-104.4) 3,012,600 2,705,200 2,734,200
Gross profit $1,067,400 $758,500 $1,345,800
Operating expenses 555,000 373,700 555,000
Income from operations $512,400 $384,800 $790,800
Invested assets ($3,400-580) $2,820,000 $1,931,700 $4,850,000
Return on Sales = Income from operations/Sales = $408,000/$4,080,000 = 0.1 = 10%
Investment turnover = net sales/Invested assets
= $4,080,000/$3,400,000
= 1.2
Dupont rate of return = return on sales multiplied by asset turnover
= 0.1 * 1.2 = 0.12 = 12%
c) The DuPont model calculates the Electronics Division's ROI by multiplying its return on sales by its asset turnover. Investment turnover equals the net sales value divided by the sum of invested assets (shareholder equity and outstanding debt). The DuPont model enables the investor to identify strengths or weaknesses that should be addressed in an investment.