1. ROI, ResidualIncome

   Raddington Industriesproduces tool and die machinery for manufacturers. The companyexpanded vertically in 20x1 by acquiring one of its suppliers ofalloy steel plates, Keimer Steel Company. To manage the twoseparate businesses, the operations of Keimer are reportedseparately as an investment center.

   Raddington monitorsits divisions on the basis of both unit contribution and return onaverage investment (ROI), with investment defined as averageoperating assets employed. Management bonuses are determined onROI. All investments in operating assets are expected to earn aminimum return of 13 percent before income taxes.

   Keimer's cost of goodssold is considered to be entirely variable, while the division'sadministrative expenses are not dependent on volume. Sellingexpenses are a mixed cost with 40 percent attributed to salesvolume. Keimer contemplated a capital acquisition with an estimatedROI of 14.5 percent; however, division management decided againstthe investment because it believed that the investment woulddecrease Keimer's overall ROI.

   The 20x2 operatingstatement for Keimer follows. The division's operating assetsemployed were $12,600,000 at November 30, 20x2, a 5 percentincrease over the 20x1 year-end balance.

   Keimer Steel Company Operating Statement For the Year Ended November 30, 20x2
   Sales revenue				$25,000,000
   Less expenses:
   Cost of goods sold		$16,500,000
   Administrative expenses		3,955,000
   Selling expenses		2,700,000		23,155,000
   Operating income before income taxes				$1,845,000

   Required:

   1.Calculate the unit contribution for Keimer Steel Company if1,187,000 units were produced and sold during the year endedNovember 30, 20x2. Round your answer to the nearest cent.
   $ per unit

   2.Calculate the following performance measures for 20x2 for KeimerSteel Company:

   a. Pretax return onaverage investment in operating assets employed (ROI).
   %

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

   3.Explain why the management of Keimer Steel Company would have beenmore likely to accept the contemplated capital acquisition ifresidual income rather than ROI were used as a performancemeasure.
   

   4.Keimer Steel Company is a separate investment center withinRaddington Industries. Identify several items that Keimer shouldcontrol if it is to be evaluated fairly by either the ROI orresidual income performance measures. (CMAadapted)