Question: ROI and RI with manufacturing costs. Excellent Motor Company makes electric cars and has two products, the Simplegreen and the Excellentgreen. To produce the Simplegreen, Excellent Motor employed assets of $10,500,000 at the beginning of 2017 and $14,450,000 of assets at the end of 2017. Other costs to manufacture the Simplegreen include the following:
Direct materials $5,000 per unit
Setup $1,500 per setup-hour
Production $ 415 per machine-hour
General administration and selling costs for Simplegreen total $7,820,000 in 2017. During the year, Excellent Motor produced 11,000 Simplegreen cars using 6,000 setup-hours and 139,000 machine-hours. It sold these cars for $12,000 each.
1. Assuming that Excellent Motor defines investment as average assets during the period, what is the return on investment for the Simplegreen division?
2. Calculate the residual income for Simplegreen if Excellent Motor has a required rate of return of 16% on investments.