Calculating ROI & RI and Comparing Results Blackwood Industries manufactures die machinery. To meet its expansion needs, it recently (2008) acquired one of its suppliers, Delta Steel. To main- tain Delta's separate identity, Blackwood reports Delta's operations as an investment center. Black- wood monitors all of its investment centers on the basis of return on investment (ROI). Management bonuses are based on ROI, and all investment centers are expected to earn a minimum 10 percent return before income taxes.
Delta's ROI has ranged from 14 percent to 18 percent since 2008. The company recently had the opportunity for a new investment that would have yielded a 13 percent ROI. However, division management decided against the investment because it believed that the investment would decrease the division's overall ROI.
The 2010 operating statement for Delta follows. The division's operating assets were $15,000,000 at the end of 2010, a 5 percent increase over the 2009 year-end balance.
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DELTA DIVISION
Operating Statement for Year Ended December 31, 2010 (000s omitted)
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Sales
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$25,000
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Cost of goods sold
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16,600
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Gross profit Operating expenses: Administration
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$2,340
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8,400
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Selling
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3,610
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5,950
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Operating income
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$ 2,450
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Required
1. Calculate the following performance measures for 2010 for the Delta division:
a. Return on average investment in operating assets.
b. Residual Income (RI) calculated on the basis of average operating assets.
2. Which performance measure (ROI or RI) should Blackwood Industries use to provide the proper incen- tive for each division to act autonomously in the firm's best interests? Would Delta's management have been more likely to accept the capital investment opportunity if RI had been used as a performance measure instead of ROI? Explain.
3. What type of strategic performance measurement do you recommend for the Delta division? Explain.