GIVEN: X Company has three operating segments. The managers of each segment have

Question

GIVEN: X Company has three operating segments. The managers of each segment have decision-making authority regarding pricing, cost control and asset investment. The following information is available for the three segments for the third quarter of 2014:

Alpha Beta Delta

Revenues $790,000 $1,245,000 $990,000

Operating Expenses $560,000 $960,000 $700,000

Invested Assets $1,600,000 $2,000,000 $2,080,000

Number of Transactions 120,000 150,000 130,000

Desired Minimum ROI 12.0% 12.0% 12.0%

The company has a centralized accounting system. For financial reporting purposes, accounting department costs and common corporate costs are allocated to the segments as follows:

Accounting Department (number of transactions) $60,000

Corporate Headquarters' Costs (per revenue dollar) $810,000

REQUIRED:

Part 1: Prepare a report showing the operating incomes of the three segments for performance evaluate purposes.

Part 2: Identify the most successful segment according to each of the following measurements: (Show supporting calculations.) Segment profit margin Segment return on investment Segment residual income

Part 3: Which of the measurements in Part 2 would you recommend for comparing the performance of the segments? Why?

So I found this question on Chegg and reposted with a different company name; the answer is below, but I don't know if it's correct; I don't understand how some of the totals are determined...for instance, the line starting with profit of 463. Please correct any errors and show how to get those totals, so that I may learn.

Part 1: Operating income = Rev - Op exp. Alpha Beta Delta Revenue $790,000 1,245,000 990,000 (-) Operating expenses 560,000 960,000 700,000 Operating income 230,000 285,000 290,000 Part 2: Allocation of accounting overheads: Alpha = 12,000/ (12,000 + 15,000 + 13,000) * 60,000 = $18,000 Beta = 15,000 / (12,000 + 15,000 + 13,000) 60,000 = $22,500 Delta = 13,000 / (12,000 + 15,000 + 13,000) = $19,500 Allocation of corporate HQ overheads: Alpha = 790,000 / (79,000 + 1,245,000 + 990,000) * 810,000 = $211,537.20 Beta = 1,245,000 / 79,000 + 1,245,000 + 990,000) * 810,000 = $333,371.90 Delta - 990000 / 79,000 + 1,245,000 + 990,000) * 810,000 = $265,090.9 Alpha Beta Delta Revenue $790,000 $1,245,000 $990,000 (-) operating expenses $560,000 $960,000 $700,000 Operating income $230,000 $285,000 $290,000 (-) Accounting overhead $18,000 $22,500 $19,500 (-) Corporate office overhead $211,537 $333,372 $265,091 Profit $463 ($70,872) $5,409 (The 463 seems wrong; doing the math there gives me 230,463, etc. for the line. Average assets $1,600,000 $2,000,000 $2,080,000 ROI 12% 12% 12% Expected income $192,000 $240,000 $249,600 Profit margin 0.06% -5.69% 0.55% ROI 0.03% -3.54% 0.26% Residual income ($191,537) ($310,872) ($244,191) Part 3: ROI is the most appropriate way to compare the segments as it is directly relates income to the assets involved.

Explanation / Answer

Answer:1

Answer:2

Allocation of accounting overheads:

Alpha = 120,000 / (12,0000 + 15,0000 + 13,0000)* 60000 = $18000

Beta = 15,0000 / (12,0000 + 15,0000 + 13,0000) 60,000 = $22,500

Delta = 13,0000 / (12,0000 + 15,0000 + 13,0000)*60000 = $19,500

Allocation of corporate HQ overheads:

Alpha = 790,000 / (79,0000 + 1,245,000 + 990,000) * 810,000 = $211,537.20

Beta = 1,245,000 / 79,0000+ 1,245,000 + 990,000) * 810,000 = $333,371.90

Delta - 990000 / 79,0000 + 1,245,000 + 990,000) * 810,000 = $265,090.9

Answer:3 ROI is the most appropriate way to compare the segments as it is directly relates income to the assets involved.

Residual income=Profit-Desired income

Particulars Alpha Beta Delta Revenue 790000 1245000 990000 Less: Operating expenses 560000 960000 700000 Operating income 230000 285000 290000

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