Raddington Industries manufacture tools and die machinery for different manufacturers. 2 years ago, the company expanded vertically by acquring Regis Steel Company, one of its suppliers of alloy steel plates. In order to handle the 2 separate businesses, the operations of Regis Steel are reported separately as an investment center.
Raddington monitors its divisions upon the basis of both unit contribution and return upon average investment (ROI), with the investment stated as average operating assests employed. Raddington has a policy of basing all employee bonuses upon divisional ROI. All investments in operating assests are anticipated to earn a minimum return of 11% before income taxes.
Regis cost of goods sold is considered to be entirely variable, while the divison's administrative expenses aren't dependent on volume. Selling expenses are mixed cost, with 40% attributed to sales volume. Over the lsat 2 years, Regis ROI has ranged from 11.8% to 14.7%. Throughout the fiscal year ended nov. 30,2012, Regis contemplated capital acquisition with estimated ROI of 11.5%, but, division management decided against the investment because it believed that the investment would reduce Regis overall ROI.
The 2012 income statement for Regis is presented next. The divisions operating assets were $15,750,000 on Nov. 30,2012, 5% increase over the 2011 year end balance.
Sales revenue- $25,000
Costs of goods sold- 16,500
Gross profit- $8,500
Administrative expenses- 3,955
Selling expenses- 2,700
Income from operations before income taxes- $1,845
A- Compute the unit contribution for Regis Steel Division if 1,484,000 units were produced and sold throughout the year ended Nov. 30,2012.
B- Compute the return on investment (ROI) for Regis Steel Division for 2012.
C- Compute the residual income, using average operating assets employed, for 2012 for Regis Steel Division.
D- Discuss why the management of Regis Steel Division would have been more likely to admit the contemplated acquisition if residual income rather than ROI were used as performance measure.
E- Regis Steel Division is separate investment center in Raddington Industries. Determine several items that Regis Steel should control if it is to be evaluated fairly by either the Roi or the residual income performance measure.