1 The following selected data relate to the Ohio Division of

1. The following selected data relate to the Ohio Division of Midwest Industries (MWI) Sales revenue Uncontrollable fixed costs traceable to the division Allocated c Controllable fixed costs traceable to the division Variable costs 4.580,000 1,360,000 590,000 1,120,000 40% of revenue te overhead Required A. Compute the following for the Ohio Division 1. Segment contribution margin 2. Controllable profit margin. 3. Segment profit margin B. Which of the three preceding measures should be used when evaluating the Ohio Division as an investment of MWI\'s resources? Why? C. Assume that management made the decision to prepare a segmented income statement that reflected Ohio\'s five operating departments. Would all S1,120,000 of the controllable fixed costs be easily traced to the departments? Briefly explain.

Solution

1) Segment contribution margin: $2,748,000 (=$4,580,000 - ($4,580,000 * 40%))

Controllable profit margin: $1,628,000 (=$2,748,000 - $1,120,000)

Segment profit margin: $268,000 (=$1,628,000 - $1,360,000)

2) Segment profit margin should be used while evaluating the Idaho Division as an investment of FWE\'s resources. It measure considering all division costs whether controllable or not. The company will have to determine whether the segment profit margin, although it is not totally controllable by the management of division is an adequate return on the assets (and effort) employed

3) The amount of $1,120,000 is easily traceable to the Idaho Division however not necessarily to the division\'s individual, smaller departments. Certain costs might be traceable to the smaller units and few may not. The untraceable costs are not allocated in an effort to avoid arbitrary results.