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.

 

Operating Assets=	$ 80,750,000
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:
a. Pretax ROI, based on average operating assets employed.
b. 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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3. The management of Reigis Steel would have been more likely to accept the contemplated capital acquisition if residual income (RI) were used as the performance measure because the investment would have increased both the division's residual income and the management bonuses. Using RI, management would accept all mvestments with a return higher than 9% as these mvestments would all increase the dollar vame of RL when using RO as a performance measure Regis management is likely to reject any nvestment that would lower the overall ROI (12.2% for 2010 even though th return is higher than the required minimum, as this would lower bonus rewards. 4. Reigis must be able to control all items related to profits and investment if it is to be evaluated fairly as an investment center using either ROI o residual income as a performance measure. Reigis must control all elements of the business except the cost of invested capital, that being controlled by Raddington Industries.