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.

REIGIS STEEL DIVISION
Operating Statement
For the Year Ended November 30, 2019
(000s omitted)
	Sales revenue					$	56,000
	Less expenses:
	Cost of goods sold	$	29,000
	Administrative expenses		6,000
	Selling expenses		4,500				39,500
	Income from operations, before tax					$	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

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Reigis Steel Division
Calculation of Variable costs	Amount $'000	Note
Total Selling expense	4,500.00	A
Less: Fixed portion (2/3)	3,000.00	B=A*2/3
Variable Selling expense	1,500.00	C=A-B
Answer 1	Amount $'000
Revenues	56,000.00
Less: Variable costs
Cost of good sold	29,000.00
Variable Selling expense	1,500.00	See C
Contribution	25,500.00	D
Number of units	1,700.00	E
Contribution per unit	15.00	F=D/E
Answer 2 a	Amount $'000
Income from operations, before tax	16,500.00	G
Average operating assets	114,250.00	H
ROI	14.44%	I=G/H
Answer 2 b	Amount $'000
Average operating assets	114,250.00	See H
Required rate of return	10%	J
Required return	11,425.00	K=H*J
Income from operations, before tax	16,500.00	See G
Residual income	5,075.00	L=G-K