Question

Alternative problem E Goodwin Company has three segments: 1, 2, and 3. Data regarding these

segments follow:

Segment 1      Segment 2      Segment 3

Contribution to indirect expenses $ 432,000        $ 208,800        $ 72,000

Assets directly used by and identified

with the segment                        3,600,000           1,440,000     360,000

a. Calculate the return on investment for each segment. Rank them from highest to lowest.

b. Assume the cost of capital is 10% for a segment. Calculate the residual income for each

segment. Rank them from highest to lowest.

c. Repeat (b), but assume the desired cost of capital is 14 per cent. Rank the segments from highest

to lowest.

Answer 1

• All working forms part of the answer
• Requirement a

Working		Segment 1	Segment 2	Segment 3
A	Contribution to indirect expenses	$         432,000.00	$        208,800.00	$          72,000.00
B	Assets	$     3,600,000.00	$    1,440,000.00	$       360,000.00
C = (A/B) x 100	Return on Investments	12.00%	14.50%	20.00%

• Requirement b

Working		Segment 1	Segment 2	Segment 3
A	Assets	$     3,600,000.00	$    1,440,000.00	$       360,000.00
B	Cost of Capital	10%	10%	10%
C = A x B	Desired Contribution	$         360,000.00	$        144,000.00	$          36,000.00
D	Actual Contribution	$         432,000.00	$        208,800.00	$          72,000.00
E = D - C	Residual Income	$           72,000.00	$          64,800.00	$          36,000.00
	Ranking	1st	2nd	3rd

• Requirement c

Working		Segment 1	Segment 2	Segment 3
A	Assets	$     3,600,000.00	$    1,440,000.00	$       360,000.00
B	Cost of Capital	14%	14%	14%
C = A x B	Desired Contribution	$         504,000.00	$        201,600.00	$          50,400.00
D	Actual Contribution	$         432,000.00	$        208,800.00	$          72,000.00
E = D - C	Residual Income	$         (72,000.00)	$            7,200.00	$          21,600.00
	Ranking	3rd	2nd	1st