Reference no: EM131914783

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?