Superior Motor Company makes electric cars and has only two products, the Simplegreen and the Superiorgreen. To produce the Simplegreen, Superior Motor employed assets of $13,500,000 at the beginning of the period, and $13,400,000 of assets at the end of the period. Other costs to manufacture the Simplegreen include:
Direct materials....... $3,000 per unit
Setup........... $1,300 per setup-hour
Production.......... $ 415 per machine-hour
General administration and selling costs total $7,340,000 for the period. In the current period, Superior Motor produced 10,000 Simple-green cars using 6,000 setup-hours and 175,200 machine-hours. Superior Motor sold these cars for $12,000 each. The company bases its ROI on average invested capital.
REQUIRED
1. Assuming that Superior Motor defines investment as average assets during the period, what is the return on investment for the Simplegreen division?
2. Calculate the residual income for the Simplegreen if Superior Motor has a required rate of return of 12% on investments.