Question

In: Accounting

ROI, Residual Income Raddington Industries produces tool and die machinery for manufacturers. The company expanded vertically...

ROI, Residual Income

Raddington Industries produces tool and die machinery for manufacturers. The company expanded vertically in 20x1 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 separately as an investment center.

Raddington monitors its divisions on the basis of both unit contribution and return on average investment (ROI), with investment defined as average operating assets employed. Management bonuses are determined on ROI. All investments in operating assets are expected to earn a minimum return of 21 percent before income taxes.

Keimer's cost of goods sold is considered to be entirely variable, while the division's administrative expenses are not dependent on volume. Selling expenses are a mixed cost with 30 percent attributed to sales volume. Keimer contemplated a capital acquisition with an estimated ROI of 22.90 percent; however, division management decided against the investment because it believed that the investment would decrease Keimer's overall ROI.

The 20x2 operating statement for Keimer follows. The division's operating assets employed were $12,105,200 at November 30, 20x2, a 6 percent increase over the 20x1 year-end balance.

Keimer Steel Company
Operating Statement
For the Year Ended November 30, 20x2
Sales revenue $25,133,000
Less expenses:
   Cost of goods sold $15,582,460
   Administrative expenses 4,153,900
   Selling expenses 2,646,000 22,382,360
Operating income before income taxes $2,750,640

Required:

1. Calculate the unit contribution for Keimer Steel Company if 1,220,700 units were produced and sold during the year ended November 30, 20x2. Round your answer to the nearest cent.
$ per unit

2. Calculate the following performance measures for 20x2 for Keimer Steel Company:

a. Pretax return on average investment in operating assets employed (ROI). Round your percentage answer to two decimal places (for example, the decimal .10555 would be entered as "10.56" percent).
%

b. Residual income calculated on the basis of average operating assets employed.
$

3. Explain why the management of Keimer Steel Company would have been more likely to accept the contemplated capital acquisition if residual income rather than ROI were used as a performance measure.

4. Keimer Steel Company is a separate investment center within Raddington Industries. Identify several items that Keimer should control if it is to be evaluated fairly by either the ROI or residual income performance measures. (CMA adapted)

Solutions

Expert Solution


Related Solutions

ROI, Residual Income Raddington Industries produces tool and die machinery for manufacturers. The company expanded vertically...
ROI, Residual Income Raddington Industries produces tool and die machinery for manufacturers. The company expanded vertically in 20x1 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 separately as an investment center. Raddington monitors its divisions on the basis of both unit contribution and return on average investment (ROI), with investment defined as average operating assets employed. Management bonuses are determined on ROI. All...
ROI, Residual Income Raddington Industries produces tool and die machinery for manufacturers. The company expanded vertically...
ROI, Residual Income Raddington Industries produces tool and die machinery for manufacturers. The company expanded vertically in 20x1 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 separately as an investment center. Raddington monitors its divisions on the basis of both unit contribution and return on average investment (ROI), with investment defined as average operating assets employed. Management bonuses are determined on ROI. All...
ROI, Residual Income Raddington Industries produces tool and die machinery for manufacturers. The company expanded vertically...
ROI, Residual Income Raddington Industries produces tool and die machinery for manufacturers. The company expanded vertically in 20x1 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 separately as an investment center. Raddington monitors its divisions on the basis of both unit contribution and return on average investment (ROI), with investment defined as average operating assets employed. Management bonuses are determined on ROI. All...
ROI, Residual Income Raddington Industries produces tool and die machinery for manufacturers. The company expanded vertically...
ROI, Residual Income Raddington Industries produces tool and die machinery for manufacturers. The company expanded vertically in 20x1 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 separately as an investment center. Raddington monitors its divisions on the basis of both unit contribution and return on average investment (ROI), with investment defined as average operating assets employed. Management bonuses are determined on ROI. All...
ROI, Residual Income Raddington Industries produces tool and die machinery for manufacturers. The company expanded vertically...
ROI, Residual Income Raddington Industries produces tool and die machinery for manufacturers. The company expanded vertically in 20x1 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 separately as an investment center. Raddington monitors its divisions on the basis of both unit contribution and return on average investment (ROI), with investment defined as average operating assets employed. Management bonuses are determined on ROI. All...
Raddington Industries is a manufacturer of tool and die machinery. Raddington is a vertically integrated company...
Raddington Industries is a manufacturer of tool and die machinery. Raddington is a vertically integrated company that is organized into two divisions. The Reigis Steel Division manufactures alloy steel plates. The Tool and Die Machinery Division uses the alloy steel plates to make machines. Raddington operates each of its divisions as an investment center. Raddington monitors its divisions on the basis of return on investment (ROI) with investment defined as average operating assets employed. Raddington uses ROI to determine management...
19-42 Calculating Return on Investment (ROI) and Residual Income (RI); Comparing Results Blackwood Industries manufactures die...
19-42 Calculating Return on Investment (ROI) and Residual Income (RI); Comparing Results Blackwood Industries manufactures die machinery. To meet its expansion needs, it recently (2014) acquired one of its suppliers, Delta Steel. To maintain Delta’s separate identity, Blackwood reports Delta’s operations as an investment center. Blackwood monitors all of its investment centers on the basis of return on investment (ROI). Management bonuses are based on ROI, and all investment centers are expected to earn a minimum 10% return before income...
The market for the products of tool and die manufacturers is relatively easy to enter and...
The market for the products of tool and die manufacturers is relatively easy to enter and includes a large number of firms that produce a variety of fixtures, dies, molds, machine tools, cutting tools, gauges, and other tools used in other manufacturing processes. 1. The above information about tool and die manufacturers implies the industry is a: a. perfectly competitive industry b. monopolistically competitive industry c .oligopoly d. monopoly 2. How would a decrease in economic activity leading to a...
The questions are all related to tool and die manufacturers. The market for the products of...
The questions are all related to tool and die manufacturers. The market for the products of tool and die manufacturers is relatively easy to enter and includes a large number of firms that produce a variety of fixtures, dies, molds, machine tools, cutting tools, gauges, and other tools used in other manufacturing processes. A. The above information about tool and die manufacturers implies the industry is a: perfectly competitive industry monopolistically competitive industry oligopoly monopoly b. How would a decrease...
ROI and Residual Income:Basic Computations Watkins Associated Industries is a highly diversified company with three divisions:...
ROI and Residual Income:Basic Computations Watkins Associated Industries is a highly diversified company with three divisions: Trucking, Seafood, and Construction. Assume that the company uses return on investment and residual income as two of the evaluation tools for division managers. The company has a minimum desired rate of return on investment of 10 percent with a 30 percent tax rate. Selected operating data for three divisions of the company follow. Trucking Division Seafood Division Construction Division Sales $1,200,000 $780,000 $900,000...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT