Problem
Baba Bicycles Ltd makes bicycles and has only two products, the wind and the cooler. To produce the wind, Baba employed assets of $2,150,000 at the beginning of the period, and $1,750,000 of assets at the end of the period. Other costs to manufacture the wind include:
a) Direct materials: $665 per unit
b) Set-up: $325 per set-up hour
c) Production: $182 per machine hour
In addition, general administration and selling costs total $78,500 for the period. In the current period, Baba produced 6,300 Tornado bicycles using 655 set-up-hours and 27,500 machine-hours. Baba sold these bicycles for $1,550 each.
A. Assuming that Baba defines investment as average assets during the period, what is the return on investment (ROI) for the wind's division?
B. Calculate the residual income (RI) for the wind Division if Baba has a required rate of return of 11.5% on investments.
C. The performance of the wind department's manager is evaluated on the basis of ROI. Describe 4 underlying issues in relation to measuring a manager's performance based on ROI and other financial measures.