Consolidated Industries is a diversified manufacturer 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 2022 operating statement for Reigis follows. The division’s operating assets employed were $80,750,000 at November 30, 2022, unchanged from the year before.

Required

1. Calculate Reigis Steel Division’s unit contribution if it produced and sold 1,500,000 units during the year ended November 30, 2022.

2. Calculate the following performance measures for 2022 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.

Transcribed Image Text:

REIGIS STEEL DIVISION Operating Statement For the Year Ended November 30, 2022 (000s omitted) Sales revenue $36,000 Less expenses: Cost of goods sold Administrative expenses Selling expenses $18,675 4,000 2,700 25,375 Income from operations, before tax $10,625