Problem 10.26 ROI, Residual Income Raddington Industries produces tool and die machinery for manufacturers. The company expanded vertically in 2014 by acquiring one of its suppliers of alloy steel plates, Keimer Steel Company. To manage the two separate businesses, the operations of Keimer are reported sepa- rately as an investment center. Raddington monitors its divisions on the basis of both unit contribution and return on aver- age investment (ROI), with investment defined as average operating assets employed. Manage- ment bonuses are determined on ROI. All investments in operating assets are expected to earn a minimum return of 13 before income taxes. Keimer's cost of goods sold is considered to be entirely variable, while the division's adminis- trative expenses are not dependent on volume. Selling expenses are a mixed cost with 40 percent attributed to sales volume. Keimer contemplated a capital acquisition with an estimated ROI of 14.5 percent; however, division management decided against the investment because it believed that the investment would decrease Keimer's overall ROL The 2015 operating statement for Keimer follows. The division's operating assets employed were at November 30, 2015, a 5 percent increase over the 2014 year-end balance. Keimer Steel Company Operating Statement For the Year Ended November 30, 2015 Sales revenue Less expenses: Cost of goods sold Administrative expenses Selling expenses Operating income before income taxes 2,700,000 23,155,000 s 1,845,000