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Segment Margins and ROI

12-56
Following is the information on Paragon Company's three product lines:

Product Line
1 2 3
Revenue $7,160,000 1,900,000 4,200,000
Variable cost percentage of sales 60% 50% 40%
Other costs 859,200 237,500 693,000
Allocated avoidable corp. costs 349,000 156,000 698,000
Allocated unavoidable corp. costs 570,800 206,500 24,000

A. Construct a segment margin statement for Paragon Company.
B. Explain why the segment margins reported for an organization unit must be interpreted carefully.

12-60 Return on investment
Michelle Gutierrez, manager of the Components Division of FX Corporation, is considering a new investment for her division. The division has an investment base of $4,000,000 and operating income of $600,000. The new investment of $500,000 supports corporate strategy and is expected to increase operating income by $50,000 next year, an acceptable level of return from corporate headquarters' point of view.

A. What is the current return on investment for the Components Division?
B. What will the ROI be if Michelle undertakes the new investment?
C. Suppose Michelle's compensation consists of a salary plus a bonus proportional to her division's ROI. Is Michelle's compensation higher with or without the new investment?

Solution Preview

12-56
Following is the information on Paragon Company's three product lines:

Product Line
1 2 3
Revenue $7,160,000 1,900,000 4,200,000
Variable cost percentage of sales 60% 50% 40%
Other costs 859,200 237,500 693,000
Allocated avoidable corp. costs 349,000 156,000 698,000
Allocated unavoidable corp. costs 570,800 206,500 24,000

A. Construct a segment margin statement for Paragon ...

Solution Summary

This explains the Segment Margins and ROI

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