Effect of ratios on given transactions.
A number of transactions follow that affect a specific division within a multiple-division company. For each transaction described, indicate whether the transaction would increase (IN), decrease (D), have no effect (N) or have an indeterminate (I) effect on the following measures: asset turnover, profit margin, ROI, and RI for the present fiscal year. Each transaction is independent:
a. The division writes down an inventory of obsolete finished goods. The journal entry is:
Cost of Goods Sold 80,000
Finished Goods Inventory 80,000
b. A special overseas order is accepted. The sales price for this order is well below the sales price on normal business but is sufficient to cover all costs traceable to this order.
c. A piece of equipment is sold for $150,000. The equipment's original cost was $900,000. At the time of sale, the book value of the equipment is $180,000. The sale of the equipment has no effect on the product sales.
d. The division fires its R 7 D manager. The manager will not be replaced during the current fiscal year.
e. The company raises it target rate of return for this division from 10 to 12 percent.
f. At midyear, the divisional manager decides to increase scheduled annual productions by 1,000 units. This decision has no effect on scheduled sales.
g. During the year, the division manager spends an additional $250,000 on advertising. Sales immediately increase thereafter.
h. The divisional manager replaced a labor-intensive operation with machine technology. This action has no effect on sales, but total annual expenses of the operation are expected to decline by 10 percent.