Problem 10.26 (Algorithmic) ROI, Residual Income

Raddington Industries produces tool and die machinery for manufacturers. The company expanded vertically in 2014 by acquiring one of its suppliers of alloy steel plates, Keimer Steel Company. To manage the two separate businesses, the operations of Keimer are reported separately 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 expected to earn a minimum return of 22 percent before income taxes.

Keimer'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 35 percent attributed to sales volume. Keimer contemplated a capital acquisition with an estimated ROI of 24.00 percent; however, division management decided against the investment because it believed that the investment would decrease Keimer's overall ROI.

The 2015 operating statement for Keimer follows. The division's operating assets employed were $12,209,600 at November 30, 2015, a 4 percent increase over the 2014 year-end balance.

Keimer Steel Company Operating Statement For the Year Ended November 30, 2015
Sales revenue			$	25,086,000
Less expenses:
Cost of goods sold	$	15,553,320
Administrative expenses		3,928,900
Selling expenses		2,676,000		22,158,220
Operating income before income taxes			$	2,927,780

Required:

1. Calculate the unit contribution for Keimer Steel Company if 1,199,100 units were produced and sold during the year ended November 30, 2015. Round your answer to the nearest cent. $ per unit

2. Calculate the following performance measures for 2015 for Keimer Steel Company:

a. Pretax return on average investment in operating assets employed (ROI). Round your percentage answer to two decimal places (for example, the decimal .10555 would be entered as "10.56" percent). %

b. Residual income calculated on the basis of average operating assets employed. $