1. Raddington Industries produces tool and die machinery for manufacturers. The company expanded vertically in 2009 by acquiring one of its suppliers of alloy steel plates, Reigis Steel Company. To manage the two separate businesses, the operations of Reigis are reported separately as an investment center.
2. Raddington monitors its divisions on the basis of both unit contribution and returns 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 of 11% before income taxes
3. Reigiss cost of goods sold is considered to be entirely variable, while the divisions administrative expenses are not dependent on volume. Selling expenses are a mixed cost with 40% attributed to sales volume. Reigis contemplated a capital acquisition with an estimated ROI of 11.5%; however, division management decided against the investment because it believed that the investment would decrease Reigiss overall ROI.
4. The 2010 operating statement for Reigis follows. The divisions operating assets employed were $15,750,000 at November 30, 2010, a 5% increase over the 2009 year-end balance.

Regis Steel Company

Operating Statement

For the Year Ended November 30, 2010 (in thousands)

Sales Revenue $25,000

Less: Expenses

Cost of Goods Sold $16,500

Administrative Expenses $3,955

Selling Expenses $2,700 $23,155

Operating Income before Income Taxes $1,845

Required

1. Calculate the unit contribution for Reigis Steel Company if 1,4984,000 units were produced and sold during the year ended November 30, 2010. (Hint: Contribution margin is the difference between the selling price and variable costs).
2. Calculate the following performance measures for 2010 for Reigis Steel Company.
   1. Pretax return on average investment in operating assets employed (ROI)
   2. Residual income calculated on the basis of average operating assets employed
3. Explain why the management of Reigis Steel Company would have been more likely to accept the contemplated capital acquisition if residual income rather than ROI were used as a performance measure
4. Reigis Steel Company is a separate investment center within Raddington Industries. Identify several items that Reigis should control if it is to be evaluated fairly by either the ROI or residual income performance measures. (CMA adapted)