Wyalusing Industries has manufactured prefabricated houses for over 20 years. The houses are constructed in sections to be assembled on customers' lots. Wyalusing expanded into the precut housing market when it acquired Fairmont Company, one of its suppliers. In this market, various types of lumber are precut into the appropriate lengths, banded into packages, and shipped to customers' lots for assembly. Wyalusing designated the Fairmont Division as an investment center. Wyalusing uses return on investment (ROI) as a performance measure, with investment defined as average productive assets. Management bonuses are based in part on ROI. All investments are expected to earn a minimum return of 15 percent before income taxes. Fairmont's ROI has ranged from 24.2 to 27.4 percent since it was acquired. Fairmont had an investment opportunity in 20x1 that had an estimated ROI of 23 percent. Fairmont's management decided against the investment because it believed the investment would decrease the division's overall ROI. The 20x1 income statement for Fairmont Division follows. The division's productive assets were $12,600,000 at the end of 20x1, a 5 percent increase over the balance at the beginning of the year. Sales revenue Cost of goods sold. Gross margin Operating expenses: FAIRMONT DIVISION Income Statement For the Year Ended December 31, 20x1 (in thousands) Administrative Selling Income from operations before income taxes $5,130 11,845 Required: 1-a. Calculate the return on investment (ROI) for 20x1 for the Fairmont Division. 1-b. Calculate residual income for 20x1 for the Fairmont Division. $ 60,150 40,100 $ 20,050 16,975 $ 3,075
Wyalusing Industries has manufactured prefabricated houses for over 20 years. The houses are constructed in sections to be assembled on customers' lots. Wyalusing expanded into the precut housing market when it acquired Fairmont Company, one of its suppliers. In this market, various types of lumber are precut into the appropriate lengths, banded into packages, and shipped to customers' lots for assembly. Wyalusing designated the Fairmont Division as an investment center. Wyalusing uses return on investment (ROI) as a performance measure, with investment defined as average productive assets. Management bonuses are based in part on ROI. All investments are expected to earn a minimum return of 15 percent before income taxes. Fairmont's ROI has ranged from 24.2 to 27.4 percent since it was acquired. Fairmont had an investment opportunity in 20x1 that had an estimated ROI of 23 percent. Fairmont's management decided against the investment because it believed the investment would decrease the division's overall ROI. The 20x1 income statement for Fairmont Division follows. The division's productive assets were $12,600,000 at the end of 20x1, a 5 percent increase over the balance at the beginning of the year. Sales revenue Cost of goods sold. Gross margin Operating expenses: FAIRMONT DIVISION Income Statement For the Year Ended December 31, 20x1 (in thousands) Administrative Selling Income from operations before income taxes $5,130 11,845 Required: 1-a. Calculate the return on investment (ROI) for 20x1 for the Fairmont Division. 1-b. Calculate residual income for 20x1 for the Fairmont Division. $ 60,150 40,100 $ 20,050 16,975 $ 3,075
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Wyalusing Industries has manufactured prefabricated houses for over 20 years. The houses are constructed in sections to
be assembled on customers' lots. Wyalusing expanded into the precut housing market when it acquired Fairmont
Company, one of its suppliers. In this market, various types of lumber are precut into the appropriate lengths, banded into
packages, and shipped to customers' lots for assembly. Wyalusing designated the Fairmont Division as an investment
center. Wyalusing uses return on investment (ROI) as a performance measure, with investment defined as average
productive assets. Management bonuses are based in part on ROI. All investments are expected to earn a minimum return
of 15 percent before income taxes. Fairmont's ROI has ranged from 24.2 to 27.4 percent since it was acquired. Fairmont
had an Investment opportunity in 20x1 that had an estimated ROI of 23 percent. Fairmont's management decided against
the Investment because it believed the investment would decrease the division's overall ROI. The 20x1 income statement
for Fairmont Division follows. The division's productive assets were $12,600,000 at the end of 20x1, a 5 percent increase
over the balance at the beginning of the year.
Sales revenue
Cost of goods sold i
Gross margin
Operating expenses:
FAIRMONT DIVISION
Income Statement
For the Year Ended December 31, 20x11
(in thousands)
Administrative
Selling
Income from operations before income taxes
$ 5,130
11,845
Required:
1-a. Calculate the return on investment (ROI) for 20x1 for the Fairmont Division.
1-b. Calculate residual income for 20x1 for the Fairmont Division.
$ 60,150
40,100
$ 20,050
16,975
$ 3,075
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