Return on Investment; Residual Income Consolidated Industries is a diversified manufacturerwith 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 expectedto earn a minimum return of 9% before income taxes.Reigis’s cost of goods sold is considered to be entirely variable; however, its administrativeexpenses do not depend on volume. Selling expenses are a mixed cost with one-third attributedto sales volume. The 2019 operating statement for Reigis follows. The division’s operating assetsemployed were $80,750,000 at November 30, 2019, unchanged from the year before.[LO 19-1, 19-2]REIGIS STEEL DIVISIONOperating StatementFor the Year Ended November 30, 2019(000s omitted)Sales revenue $36,000Less expenses:Cost of goods sold $18,675Administrative expenses 4,000Selling expenses 2,700 25,375Income from operations, before tax $10,625Required1. Calculate Reigis Steel Division’s unit contribution if it produced and sold 1,500,000 units during theyear ended November 30, 2019.2. Calculate the following performance measures for 2019 for Reigis:a. Pretax ROI, based on average operating assets employed.b. Residual income (RI), calculated on the basis of average operating assets employed.3. Reigis management is presented the opportunity to invest in a project that would earn an ROI of 10%. IsReigis likely to accept the project? Why or why not?4. Identify several items that Reigis should control if it is to be fairly evaluated as a separate investmentcenter within Consolidated Industries using either ROI or RI performance measures.
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.
[LO 19-1, 19-2]
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.
2. Calculate the following performance measures for 2019 for Reigis:
a. Pretax ROI, based on average operating assets employed.
b. Residual income (RI), calculated on the basis of average operating assets employed.
3. Reigis management is presented the opportunity to invest in a project that would earn an ROI of 10%. Is
Reigis likely to accept the project? Why or why not?
4. Identify several items that Reigis should control if it is to be fairly evaluated as a separate investment
center within Consolidated Industries using either ROI or RI performance measures.
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
