1) Sedanos Supermarket has prepared the following segmented income statement for three of its departments in its flagship store in late 2006. Agustin Herrn is contemplating dropping the magazines and selling (not eliminating) the pharmacy business to Navarro Discount Pharmacies. He sees that those two departments are losing money and the bread department is only marginally profitable and may be able to do better if he could expand the space into the space now occupied by the magazine dept. Corporate costs are allocated equally among all departments.

BreadMagazinesPharmacyTotal

Sales$350,000$120,000$350,000$820,000

Variable expenses220,00095,000290,000605,000

Contribution margin130,00025,00060,000215,000

Other costs 60,000 10,000 65,000 135,000

Segment margin70,00015,000(5,000)80,000

Allocated avoidable costs 18,000 10,000 20,000 48,000

Segment income52,0005,000(25,000)32,000

Allocated corporate costs 50,000 50,000 50,000150,000

Corporate profit$ 2,000 $(45,000)($75,000)($118,000)

1.1. Prepare a more useful and understandable segmented income statement for Sr. Herrn.

1.2. Based on your segmented income statement, should Sr. Herrn drop the magazine department? Why or why not?

1.3. Based on your segmented income statement, should Sr. Herrn sell the pharmacy? Why or why not?

Problem 2

Homestead Farming Companys last year sales were $6,200,000, operating income was $320,000, and the investment was $1,600,000. The cost of capital is 12%.

2.1Calculate the companys ROI efficiency.

2.2Calculate the companys ROI productivity.

2.3Calculate the companys ROI.

Homestead Farming has the opportunity to buy adjoining land for $1,000,000 that will increase sales by 4,000,000 and net income by $130,000. Homestead Farming is a division of Dole Fresh Foods and Homesteads management is evaluated on ROI.

2.4 Would management make the investment?

2.5 Suppose management is evaluated on residual income. Would management make the investment?

2.6 Which decision benefits Dole Fresh Foods?

Problem 3

Read Greening With EVA, Mark Epstein and David Young

Answer the following questions:

1. Explain the concept of EVA.

2. How is EVA calculated?

3. How does EVA differ from ROI and Residual Income?

4. What are your thoughts on EVA?