Return on Investment; Residual Income Raddington Industries is a diversified manufacturer with several divisions, including the Reigis Division. Raddington 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 9 percent 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 40 percent attributed to sales volume. The 2010 operating statement for Reigis follows. The division’s operating assets employed were $80,750,000 at November 30, 2010, unchanged from the year before.
REIGIS STEEL DIVISION Operating Statement For the Year Ended November 30, 2010 (000s omitted) | ||
Sales revenue |
| $35,000 |
Less expenses: |
|
|
Cost of goods sold | $18,500 |
|
Administrative expenses | 3,955 |
|
Selling expenses | 2,700 | 25,155 |
Income from operations, before tax |
| $ 9,845 |
Required
1. Calculate Reigis Steel Division’s unit contribution if it produced and sold 1,484,000 units during the year ended November 30, 2010.
2. Calculate the following performance measures for 2010 for Reigis:
Pretax ROI, based on average operating assets employed.
Residual income (RI), calculated on the basis of average operating assets employed.
3. Reigis management is presented the opportunity to invest in a project that would earn an ROI of 10 percent. Is Reigis likely to accept the project? Why or why not?
4. Identify several items that Reigis should control if it is to be fairly evaluated as a separate investment center within Raddington Industries using either ROI or RI performance measures.
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