Raddington Industries produces tool and die machinery for manufacturers. In 2001, the company acquired one of its suppliers of alloy steel plates, Reigis Steel Company. In order to manage the two separate businesses, the operations of Reigis are reported separately as an investment centre.

Raddington monitors its divisions based on their divisional contribution margin and return on average investment, with investment defined as the average operating assets employed. It bases management bonuses on the ROI. The average cost of capital is 13% of the operating investment.

Reigis'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 40% attributed to the sales volume. Reigis recently contemplated a capital acquisition with an estimated ROI of 13.5%; however, division management decided against the investment because it believed the investment would decrease Reigis's overall ROI. Th e 2012 operating statement for Reigis follows. The division used operating assets of $25,000,000 at June 30, 2012, a 5% increase over the 2011 year-end balance.

(a) Calculate the following performance measures for 2012 for the Reigis Steel division:
(1) The ROI before tax, and
(2) The residual income.
(b) Explain why management of the Reigis Steel division would have been more likely to accept the capital acquisition if it had used residual income rather than the ROI as a performance measure.
(c) The Reigis Steel division is a separate investment centre within Raddington Industries. Identify several items that Reigis should control if it is to be evaluated fairly by either the ROI or residual income performance measures

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REIGIS STEEL DIVISIONN Year Ended June 30, 2012 (in thousands) Sales revenue Less expenses: $27,000 Cost of goods sold Administrative expenses Selling expenses $16,500 4,300 2,700 23,500 S3,500 Income from operations before income taxes