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.

• 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?