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 9% 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 $80,750,000 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 $ 36,000 Less expenses: Cost of goods sold $ 18,675 Administrative expenses 4,000 Selling expenses 2,700 25,375 Income from operations, before tax $ 10,625 Required: 1. Calculate Reigis Steel Division’s unit contribution if it produced and sold 1,500,000 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.) 3. Reigis management is presented the opportunity to invest in a project that would earn an ROI of 10%. Reigis is likely to: accept the project because ROI is higher than the required rate of return. reject the project because the ROI would lower the current overall ROI. accept the project because positive ROI means a positive dollar value of return. reject the project because it poses too much risk. Next Visit question mapQuestion 3 of 8 Total3 of 8 Prev

Answer 1

Answer:

Contribution margin

= Sales revenue – Cost of goods sold – (variable portion of selling cost)

= 36,000,000 – 18,675,000 - (2,700,000 / 3) = 16,425,000

.

1.) Contribution margin per unit

= Contribution Margin ÷ Sales revenue

= 16,425,000 / 1500000

= 10.95 per unit

.

2.)

a) ROI

ROI = Net income/Operating assets

= 10,625,000 / 80,750,000

= 13.16%

.

b) Residual income

= Net Income - Expected minimum return

= 10,625,000 - (80,750,000   * 10%)

= 10,625,000 - 8,075,000

= $2,550,000

.

3.)

Reigis is likely to: accept the project because ROI is higher than the required rate of return.

Explanation:

A. Option A is correct because a project with return higher than the required rate of return is accepted.

B.  Option B is incorrect because this project has a strong ROI that would increase the current overall ROI.

C.  Option C is incorrect because positive ROI means is not the basic consideration for accepting projects.

D. Option D is Incorrect because this project should be accepted because it gives a higher return than expected.