Case Study on ROI

and Responsibility Center:

Arlington Industry

Group 2
Mgmt 2221 SRU-1 – Management Accounting and Control
Saturday, April 29, 2023 | 08:30 – 11:00AM
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Objectives of the case study
ROI, RI and Contribution Margin
To find the Contribution Margin, ROI,
and RI rate for Raddix Plastics
division after the acquisition.
RI versus ROI
To discuss ROI and RI as
performance measures for the
Raddix Plastics.
Pros and Cons: ROI and RI
To identify one particular
disadvantage of ROI and RI as main
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performance indicators.
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Responsibility Centers
To identify other responsibility
centers of Arlington Industries apart
from the investment center.
Control and Performance Measures
To identify segments that Raddix
Plastics should control if ROI and RI
is the performance measure.
Open discussion
To extend self-learning through
class discussion.
2
Pointers for discussion
• Arlington Industries acquired one of its suppliers five years
ago, the Raddix Plastics.
• Arlington monitors its division based on both product
contribution and return on investment (ROI).
• “Investment” is defined as average operating assets
employed.
• The cost of goods sold at Raddix is variable, while
administrative expenses are not dependent on sales
volume.
• Division management decided against the capital
acquisition because it believed that it would decrease the
division’s ROI.
 Arlington Industries Case Study:
by the numbers

11% 40% 11.8% - 14.7%

Minimum return of all Total selling expenses is ROI at Raddix Industries
operating assets before attributed to sales since the acquisition of
income taxes volume. Raddix Plastics.

11.5% $15,750,000 $16,537,500

Estimated ROI on the
Raddix’s operating asset Raddix’s operating asset
capital acquisition at
at year end. at the end of previous
Raddix since the end of
year.
the fiscal year.

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Additional data:
Abbreviated Income Statement of Raddix Plastics
Raddix Plastics Division Income Statement
For the Year Ended December 31 ($000 omitted)

Sales revenue $25,000

​Expenses ​ ​
​          Cost of goods sold ​$16,500 ​

​          Administrative expenses ​$3,955

​          Selling expenses ​$2,700 ($23,155)

​Income from operations ​ ​$1,845
​ ​ ​

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Case Study Question 1:
Calculate the unit contribution margin for Raddix Plastics if 1,484,000 units we’re produced
and sold during the fiscal year ended December 31.

Cost of Goods Sold $16,500

Step 1: Find the Total Contribution Margin Selling Expense (2,700 x 40%) 1,080
Total Variable Cost $17, 580
Contribution Margin (CM) = Sales – Variable Cost
Contribution Margin (CM) = $25,000,000 – $17,580,000
Contribution Margin (CM) = $ 7,420,000

Step 2: Compute for the Contribution Margin per unit

Contribution Margin/unit (CM/u) = Total Contribution Margin/ total units sold

Contribution Margin/unit (CM/u) = $ 7,420,000/ 1,484,000

Contribution Margin/unit (CM/u) = $ 5.00

Case Study Question 2:
Based on the average operating assets employed, calculate return on investment (ROI) and
residual income (RI) for the Raddix Plastics Division.

Solution for Return on Investment:

ROI = Income/ Average Capital Assets
ROI = $1,845,000/ ([$15,750,000 + $15,000,000]/2)
ROI = $1,845,000/ ($30,750,000/2)
ROI = $1,845,000/ $15,375,000

Return on Investment (ROI) = 0.12%

Case Study Question 2:
Based on the average operating assets employed, calculate return on investment (ROI) and
residual income (RI) for the Raddix Plastics Division.

Solution for Residual Investment:

RI = Project Profit – (Project Invested Capital x Minimum Required Rate of Return)

RI = $1,845,000 – ($15,375,000 x 0.11)
RI = $1,845,000 - $1,691,250

Residual Income (RI) = $153,750

Case Study Question 3:
Explain why the management of Raddix Plastics would have been more likely to accept the
proposed capital acquisition if RI rather than ROI was used as a performance measure.

RI
ROI (12%)
(11%)
Not within the 11.8%
Within the 11.8%
to 14.7% range to 14.7% range
Case Study Question 4:
Identify one disadvantage for the organization to focus only on ROI and RI, respectively.

If quantitative measurement is the only measurement to use

as performance indicators, it will be prone to alteration,
resulting to low reliability.

• Quantitative reports can be altered to pivot towards

individual interest.

• This alterations could also result to different perception of

the leadership team as to the real performance of the
company.

• Reports cannot be used as a viable source of information for

any company-wide decision making.
Case Study Question 5:
Raddix Plastics is a separate investment center within Arlington Industries.
Identify three other types of responsibility centers.

Discretionary Revenue
Profit Center
Cost Center Center
Case Study Question 6:
Identify the items that Raddix should control if it is to be evaluated fairly by using
ROI or RI performance measures.
Sales value Minimum rate of return
Higher sales value means higher Minimum rate of return should be
profit.income, resulting to increase in realistic and attainable – too high rate
RI or ROI regardless of the operating of return will result to more strict
expense. project approval.

Capital assets
Lower capital assets will result to a
higher ROI and RI, assuming that
income/profit remains as is.
 Q&A

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