Tool Industries

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 businesses, 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 13% before income taxes.

Alloy Steel Plate

Alloy Steel Plates Investment Centers cost of goods sold is considered to be entirely variable, in which the administrative expenses are NOT dependent on volume. Selling expenses are a mixed cost with 40% attributed to sales volume. Alloy Steel Plates Investment Centers operating assets employed were $12,600,000 on December 31, 20x2 which is a 5% increase over January 1, 20x1 balance. Alloy Steel Plates Investment Center produced and sold the following units for the year ended December 31, 20x2 1,187,000 units. The 20x2 operating statement for Alloy Steel Plates Investment Center follows:

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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 14.50% using residual income rather than ROI were used as performance measures.

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.

25,000,000 Alloy Steel Plates Investment Center Operating Statement For the year ended December 31, 20x2 Sales Revenue Less Expenses: Cost of goods sold $ 16,500,000 Administrative expenses 3,955,000 Selling expenses Operating income before income taxes 20,455,000 4,545,000