----------- Part 2A Tool Industries produces tool machinery for manufacturers. The company expanded vertically in 20x1 acquiring one of its suppliers of alloy steel plates. To manage the two separate business, the operations of the alloy steel plates are reported separately as an investment center, which will now be titled Alloy Steel Plates Investment Center. Tool Industries evaluates its investment centers 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 expected to earn a minimum return of 10% before income taxes. Alloy Steel Plates Investment Center cost of goods sold is considered to be entirely variable. Administrative expenses are fixed costs. Selling expenses are a mixed cost with 40% attributed to sales volume Alloy Steel Plates Investment Center operating assets employed were Alloy Steel Plates Investment Center produced and sold the following units for year ended December 31, 20x2 $12,600,000 at December 31, 20x2 which is a 1,150,000 units 6% increase over January 1, 20x2 balance. The 20x2 operating statement for Alloy Steel Plates Investment Center follows: Alloy Steel Plates Investment Center Operating Statement For the year ended December 31, 20x2 $ 25,009,000 $ Sales Revenue Less Expenses: Cost of goods sold Administrative expenses Selling expenses Operating income before income taxes 16,500,000 3,955,000 2,700,000 $ $ 23,155,000 1,854,000 Required: Answer the requirements under each of the required 4 areas. If you need to make a calculation you must provide cell references to earn credit. 1. Calculate the unit contribution (rounded to the nearest cent) for the Alloy Steel Plates Investment Center for the year ended December 31, 20x2. 2. Calculate the following performance measures for 20x2 for Alloy Steel Plates Investment Center. a. Pretax return on average investment in operating assets employed (ROI) b. Residual income calculated on the basis of average operating assets employed. 14.00% 3. Explain why the management of Alloy Steel Plates Investment Center would be more likely to accept the following contemplated capital acquisition with an estimated ROI of using residual income rather than ROI were used as performance measure. 4. Alloy Steel Plates Investment Center is a separate investment center within Tool Industries. Identify 3 items that Alloy Steel Plates Investment Center would control if it is evaluated fairly by either the ROI or residual income performance measures. Make sure you explain why you picked these 3 items to control and how these items impact these performance measures
