Raddington Industries produces tool and die machinery for manufacturers. The company expanded vertically in 1998 by acquiring one of its suppliers of alloy steel plates, Reigis Steel Company. To manage the two separate businesses, the operations of Reigis are reported sep¬

arately 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 ex¬

pected to earn a minimum return of 11% before income taxes.

Reigis's cost of goods sold is considered to be entirely variable, while the division's ad¬

ministrative expenses are not dependent on volume. Selling expenses are a mixed cost with 40% attributed to sales volume. Reigis contemplated a capital acquisition with an estimated ROI of 11.5%; however, division management decided against the investment because it be¬

lieved that the investment would decrease Reigis's overall ROI.

The 2002 operating statement for Reigis is presented below. The division's operating assets employed were $15,750,000 at November 30, 2002, a 5% increase over the 2001 yearend balance.

Required:
1. Calculate the unit contribution for Reigis Steel Division if 1,484,000 units were produced and sold during the year ended November 30, 2002.
2. Calculate the following performance measures for 2002 for the Reigis Steel Division:

a. Pretax return on average investment in operating assets employed (ROI).

b. Residual income calculated on the basis of average operating assets employed.
3. Explain why the management of the Reigis Steel Division would have been more likely to accept the contemplated capital acquisition if residual income rather than ROI were used as a performance measure.
4. The Reigis Steel Division is a separate investment center 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. (CMA adapted)

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Reigis Steel Division Operating Statement For the Year Ended November 30, 2002 (S000 omitted) Sales revenue $25,000 Less expenses: Cost of goods sold $16,500 Administrative expenses 3,955 Selling expenses 2,700 23,155 Income from operations before income taxes $ 1,845