Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Raddington Industries is a manufacturer of tool and die machinery. Raddington is a vertically integrated company that is organized into two divisions. The Reigis Steel

Raddington Industries is a manufacturer of tool and die machinery. Raddington is a vertically integrated company that is organized into two divisions. The Reigis Steel Division manufactures alloy steel plates. The Tool and Die Machinery Division uses the alloy steel plates to make machines. Raddington operates each of its divisions as an investment center.

Raddington monitors its divisions on the basis of return on investment (ROI) with investment defined as average operating assets employed. Raddington uses ROI to determine management bonuses. All investments in operating assets are expected to earn a minimum return of 11% before income taxes. For many years, Reigiss ROI has ranged from 11.8% to 14.7%. During the fiscal year ended December 31, 19_8, Reigis contemplated a capital acquisition with an estimated ROI of 11.5%; division management, however, decided against the investment because it believed that the investment would decrease Reigiss overall ROI.

Reigiss 19_8 operating income statement follows. The divisions operating assets employed were $15,750,000 at December 31, 19_8, a 5% increase over the 19_7 year-end balance.

Reigis Steel Division Operating Income Statement for the Year Ended December 31, 19_8

Revenue $25,000,000

Cost of goods sold 16,500,000

Gross margin 8,500,000

Operating costs

Administrative $3,955,000

Marketing 2,700,000

Operating costs 6,655,000

Operating income $ 1,845,000

Required

1. Calculate the return on investment and residual income for 19_8 for the Reigis Steel Division. What other information would you need to calculate EVA?

2. Would the management of Reigis Steel Division have been more likely to accept the investment opportunity it had in 19_8 if residual income were used as a performance measure instead of ROI? Explain.

3. For each of the following questions, indicate whether the margin and turnover will increase, decrease, or remain unchanged as a result of the events described below (no need to compute), and then compute the new ROI figure. Consider each question separately, starting in each case from the original ROI computed in (1) above.

a. By use of JIT to control the purchase of some items of raw materials, the company is able to reduce the average level of inventory by $1,000,000.

b. Sales are increased by $1000,000; operating assets remain unchanged.

c. Obsolete items of inventory carried on the records at a cost of $200,000 are scrapped and written off as a loss.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Credit Repair How To Repair Your Credit All By Yourself A Beginners Guide To Better Credit

Authors: Ernie Braveboy

1st Edition

1981032878, 978-1981032877

More Books

Students also viewed these Accounting questions