Part 2
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 3
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 5
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?