Question

Consolidated Industries is a diversified manufacturer with business units organized as divisions, including the Reigis Steel Division. Consolidated monitors its divisions on the basis of both unit contribution and return on investment (ROI), with investment defined as average operating assets employed. All investments in operating assets are expected to earn a minimum return of 10% before income taxes. Reigis's cost of goods sold is considered to be entirely variable; however, its administrative expenses do not depend on volume. Selling expenses are a mixed cost with one-third attributed to sales volume. The 2019 operating statement for Reigis follows. The division's operating assets employed were $114,250,000 at November 30, 2019, unchanged from the year before. $ 56,000 REIGIS STEEL DIVISION Operating Statement For the Year Ended November 30, 2019 (000s omitted) Sales revenue Less expenses: Cost of goods sold $ 29,000 Administrative expenses 6,000 Selling expenses 4,500 Income from operations, before tax 39,500 $ 16,500 Required: 1. Calculate Reigis Steel Division's unit contribution if it produced and sold 1,700,000 units during the year ended November 30, 2019. (Round your answer to 2 decimal places.) 2. Calculate the following performance measures for 2019 for Reigis: a. Pretax ROI, based on average operating assets employed. (Round your answer to 2 decimal places.) b. Residual income (RI), calculated on the basis of average operating assets employed. (Enter your answer in whole dollars, not in thousands.)

Answer 1

Answer:

Contribution margin = 56000-29000-(4500/3) = 25500

a) Contribution margin per unit = 25500000/1700000 = 15 per unit

b) ROI = Net income/Operating assets = 16500000/114250000= 14.44%

c) Residual income = 16500000-(114250000*10%) = 5075000