Part 1 - The management accountant for the Pen Company has prepared the following segmented income statement for each of its three product lines.
|
Haco
|
Zinc
|
Fielder
|
Total
|
|
Sales
|
$500,000
|
$350,000
|
$450,000
|
$1,300,000
|
|
Variable expenses
|
360,000
|
260,000
|
290,000
|
910,000
|
|
Contribution margin
|
140,000
|
90,000
|
160,000
|
390,000
|
|
Other costs
|
20,000
|
20,000
|
20,000
|
60,000
|
|
Segment margin
|
120,000
|
70,000
|
140,000
|
330,000
|
|
Allocated avoidable costs
|
30,000
|
30,000
|
40,000
|
100,000
|
|
Segment income
|
90,000
|
40,000
|
100,000
|
230,000
|
|
Allocated corporate costs
|
40,000
|
50,000
|
40,000
|
130,000
|
|
Corporate profit
|
$50,000
|
$(10,000)
|
$60,000
|
$100,000
|
- Do you recommend dropping the Zinc product line? Why or why not?
- If the Haco product line had been discontinued, the short-term effect on corporate profits would be a decrease of what amount?
- Assume that the Fielder product line has been discontinued and long-term capacity has had time to adjust. The projected long-term effect of this action on annual corporate profits would be a decrease of what amount?
- Assume that an advertising campaign could increase revenues for any of the products by $15,000. To maximize corporate profits, which product line should receive the advertising dollars? Why?
Part 2 - Department income totals $500,000, investment in the department is $2,000,000, and the company's cost of capital is 10%.
- Calculate the return on investment (ROI) for this department.
- Calculate economic value added.
Part 3 - The manager of the processing division of XYZ Corporation is considering the purchase of new equipment, which would modernize an aging plant. Currently, the division has an asset base of $8,000,000 and net operating income of $1,200,000. The new equipment is expected to cost $1,000,000; it supports the corporate strategy of competing on the basis of quality and customer response time. The new investment is also expected to increase operating income by $100,000 next year, which is an acceptable return on investment from the standpoint of corporate management.
- What is the current ROI for the processing division of XYZ Corporation? (Show calculations.)
- What will be the divisional ROI if the new investment is undertaken?
- Suppose that the compensation contract for the manager of the processing division consists of a base salary plus a bonus that is proportional to the ROI earned by the division. Is this manager's total compensation higher with or without the new investment? (Show calculations.)
- What changes to the divisional manager's compensation contract might corporate management make that would better align divisional manager's compensation (and performance evaluation) with overall corporate goals?