Question

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Blackwood Industries manufactures die machinery. To meet its expansion needs, it recently (2017) 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 taxes.

Delta's ROI has ranged from 14% to 18% since 2017. The company recently had the opportunity for a new investment that would have yielded a 13% ROI. However, division management decided against the investment because it believed that the investment would decrease the division's overall ROI.

The 2019 operating statement for Delta follows. The division's operating assets were $16,000,000 at the end of 2019, a 6% increase over the 2018 year-end balance.

DELTA DIVISION
Operating Statement
For Year Ended December 31, 2019 (000s omitted)
	Sales					$	29,500
	Cost of goods sold						19,920
	Gross profit						9,580
	Operating expenses:
	Administration	$	2,808
	Selling		4,332				7,140
	Operating income					$	2,440

Required:

1. Calculate the following performance measures for 2019 for the Delta division:

a. Return on average investment in operating assets. (Round your intermediate calculations to the nearest whole dollar and final answer to 2 decimal places.)

b. Residual income (RI) calculated on the basis of average operating assets. (Round your intermediate calculations. Enter your answer in whole dollars, not in thousands)

1a	Return on Investment (%)
1b	Residential Income

Answer 1

A)Return on investment is the performance evaluation method which consider the average investment and the operating income and measures the rate at which the investment are generating the operating income.

Here the net operating income is given in (000's) = $ 2440 .

Average operating assets converted in ,( 000's) = $ 16,000.

Return on investment = Operating income/ average operating assets.

Return on investment = $ 2440 / 16000 = 15.25%.

B) Residual income is also a performance evaluation method which Account for the actual income over the expected income i.e income above opportunity costs.

Here expected minimum rate of return is ,10 %

Actual income in thousands = $ 2400, expected return ,= 10% and average investment in thousands = $ 16000.

Residual income = Operating income - ( Average investment × expected rate of return).

Residual income in thousands = $ 2400 - ( 16000 ×10%).

Residual income in thousands = $ 2400 - $ 1600.

Residual income = $ 800,000.

Thus , a) 15.25 %. , b ) $ 800,000