advanced) Anderson Industries produces stamping machinery for manufacturers. The company expanded vertically in 2001 by acquiring a supplier, DuCharm Company. To manage the two separate businesses, DuCharm is now operated as a divisional investment center.

Anderson 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 based on ROI. All investments in operating assets are expected to earn a minimum re¬ turn of 11 percent before income taxes.

DuCharm s cost of goods sold is entirely variable, whereas the division’s administrative expenses are totally fixed. Selling expenses are a mixed cost with 40 percent attributed to sales volume. DuCharm’s ROI has ranged from 11.8 percent to 14.7 percent since 2001. During the fiscal year ended No¬ vember 30, 2006, DuCharm contemplated a capital acquisition with an esti¬ mated ROI of 11.5 percent; however, division management decided that the investment would decrease DuCharm’s overall ROI.

The division’s operating assets employed were $15,750,000 at November 30, 2006, a 5 percent increase over the 2005 year-end balance. The division’s 2006 income statement follows.

a. Calculate the segment contribution for the DuCharm Division:
1,484,000 units were produced and sold during the year ended Novem¬ ber 30, 2006.

b. Calculate the following performance measures for 2006 for the DuCharm Division:
1. pre-tax return on average investment in operating assets employed (ROI), and 2. residual income calculated on the basis of average operating assets employed.

c. Explain why the management of the DuCharm Division would have been more likely to accept the contemplated capital acquisition if resid¬ ual income rather than ROI were used as a performance measure.

d. The DuCharm Division is a separate investment center within Anderson Industries. Identify several items that DuCharm should control if it is to be evaluated fairly by either the ROI or residual income performance measures.

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Sales revenue Less expenses DUCHARM DIVISION Income Statement For the Year Ended November 30, 2006 ($000 Omitted) Cost of goods sold Administrative expenses Selling expenses Income from operations before income taxes $ 25,000 $16,500 3,955 2,700 (23,155) $ 1,845