Question

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 17 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 19.50 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 $13,356,000 at November 30, 20x2, a 5 percent increase over the 20x1 year-end balance.

Keimer Steel Company Operating Statement For the Year Ended November 30, 20x2
Sales revenue				$25,408,000
Less expenses:
Cost of goods sold		$16,007,040
Administrative expenses		4,142,500
Selling expenses		2,671,000		22,820,540
Operating income before income taxes				$2,587,460

Required:

1. Calculate the unit contribution for Keimer Steel Company if 1,168,000 units were produced and sold during the year ended November 30, 20x2. Round your answer to the nearest cent.
$ fill in the blank 1 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).
fill in the blank 2 %

b. Residual income calculated on the basis of average operating assets employed.
$ fill in the blank 3

Answer 1

Keimer steel
Answer 1	Amount $	Note
Sales value	25,408,000.00	A
Less: Variable costs
Cost of goods sold	16,007,040.00
Variable selling expense (2671000*30%)	801,300.00
Total Variable costs	16,808,340.00	B
Total Contribution margin	8,599,660.00	C=A-B
Units sold	1,168,000.00	D
Contribution margin per unit	7.00	E=C/D
Answer 2 a	Amount $
Closing operating assets	13,356,000.00	F
Opening operating assets	12,720,000.00	G=F/105%
Average operating assets	13,038,000.00	H=(F+G)/2
Operating income before income tax	2,587,460.00	I
Return on investment	19.85%	J=I/H
Answer 2 b	Amount $
Average operating assets	13,038,000.00	See H
Required return at 17%	2,216,460.00	K=H*17%
Operating income before income tax	2,587,460.00	See I
Residual income	371,000.00	L=I-K