Income: Decision Focus order to manage the two separate businesses, the operatio

ID: 2433023 • Letter: I

Question

Income: Decision Focus order to manage the two separate businesses, the operations of Regis Steel are reported separately as an investment center moniltors its divisions on the basis of both unit contribution and return on a amplayee bonuses on divisional ROt, A All investments in operating assets are axpected to earm a minimum return of 11 percent before income taxes. Regis's cost of goods sold is considered to be entiraly variable, whereas the division's a volume. Over the last two years, Regis's ROI has ranged from 11.8 percent to 14.7 percent. During the fiscal year ended N percent; however, division management decided against the investment because it believed that the investment would decrease Regis's overall ROr. me 2012 income statement for Regis is presentad balo me di sion's oparating assets were $15,750,000 an November 30, 2012, a 5 percent increase over the 2011 year-end balance. e expenses are not dependent on volume. Selling expenses are a mixed cost, with 40 percent attributed to sales r 30, 2012, Regis contamplated a capital acquisition with an estimated ROI of 11.5 30, 2012 ($000 omitted) s 8500 experses 2,700 1,845 The input in the box below will not be graded, but may be reviewed and considered by your instructor several items that O Type here to /29/2018

Explanation / Answer

Regis Steel Division Operating Statement For the Year Ended November 30, 2012 ($000 omitted)

Particular

Sales Revenue

25,000.00

Variable Cost

Less

Cost of good sold

16,500.00

Selling Exp.

2,700.00

19,200.00

Contribution Margin

5,800

Units Contribution Margin

3.91

(B)

Return on investment (ROI) for Regis Steel Division for 2012

Income from operations before taxes/average operating assets

1845000/15750000

12%

(C)

Calculate the residual income, using the average operating assets employed, for 2012 for Regis Steel Division

RI = income from operations before taxes – minimum required return on average assets

1845000-(11%*15750000)

$ 112,500.00

In the same way, excessive cost-cutting activities can improve short-term ROI, but can harm the business’s competitiveness in future

thank you.