RLG100Y1 Lecture : Notes on Faith Without Fear Film
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Raddington Industries producestool-and-die machinery for various manufacturers. Two years ago,the company expanded vertically by acquiring Regis Steel Company,one of its suppliers of alloy steel plates. In order to manage thetwo separate businesses, the operations of Regis Steel are reportedseparately as an investment center.
Raddington monitors its divisions onthe basis of both unit contribution and return on averageinvestment (ROI), with the investment defined as average operatingassets used. Raddington has a policy of basing all employee bonuseson divisional ROI. All investments in operating assets are expectedto earn a minimum return of 11 percent before income taxes.
Regisâs cost of goods sold isconsidered to be entirely variable, whereas the divisionâsadministrative expenses are not dependent on volume. Sellingexpenses are a mixed cost, with 40 percent attributed to salesvolume. Over the last two years, Regisâs ROI has ranged from 11.8percent to 14.7 percent. During the fiscal year ended November 30,2012, Regis contemplated a capital acquisition with an estimatedROI of 11.5 percent; however, division management decided againstthe investment because it believed that the investment woulddecrease Regisâs overall ROI.
The 2012 income statement for Regis ispresented next. The divisionâs operating assets were $15,750,000 onNovember 30, 2012, a 5 percent increase over the 2011 year-endbalance.
Regis Steel Division OperatingStatement For the Year Ended November 30, 2012 ($000 omitted) | |
---|---|
Sales revenue | $25,000 |
Cost of goods sold | 16,500 |
Gross profit | $ 8,500 |
Administrative expenses | 3,955 |
Selling expenses | 2,700 |
Income from operations before incometaxes | $ 1,845 |
Required
A.Calculate the unit contribution for Regis Steel Division if1,484,000 units were produced and sold during the year endedNovember 30, 2012.
B.Calculate the return on investment (ROI) for Regis SteelDivision for 2012.
C.Calculate the residual income, using the average operatingassets employed, for 2012 for Regis Steel Division.
D.Explain why the management of Regis Steel Division would havebeen more likely to accept the contemplated acquisition if residualincome rather than ROI were used as a performance measure.
E.Regis Steel Division is a separate investment center withinRaddington Industries. Identify several items that Regis Steelshould control if it is to be evaluated fairly by either the ROI orthe residual income performance measure.