Wyalusing Industries has manufactured prefabricated houses for over 20 years. The houses are constructed in sections t 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 int 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 14 percent before income taxes. Fairmont's ROI has ranged from 29.2 to 32.4 percent since it was acquired. Fairmont had an investment opportunity in 20x1 that had an estimated ROI of 28 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 $18,900,000 at the end of 20x1, a percent increase over the balance at the beginning of the year. FAIRMONT DIVISION Income Statement For the Year Ended December 31, 20x1 (in thousands) Sales revenue Cost of goods sold Gross margin Operating expenses: $5,280 15,655 $ 68,070 41,600 $ 26,470 Administrative Selling Income from operations before income taxes Required: 1-a. Calculate the return on investment (ROI) for 20x1 for the Fairmont Division. 1sh Calculate residual income for 20x1 for the Fairmont Division 20,935 $ 5,535
Wyalusing Industries has manufactured prefabricated houses for over 20 years. The houses are constructed in sections t 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 int 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 14 percent before income taxes. Fairmont's ROI has ranged from 29.2 to 32.4 percent since it was acquired. Fairmont had an investment opportunity in 20x1 that had an estimated ROI of 28 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 $18,900,000 at the end of 20x1, a percent increase over the balance at the beginning of the year. FAIRMONT DIVISION Income Statement For the Year Ended December 31, 20x1 (in thousands) Sales revenue Cost of goods sold Gross margin Operating expenses: $5,280 15,655 $ 68,070 41,600 $ 26,470 Administrative Selling Income from operations before income taxes Required: 1-a. Calculate the return on investment (ROI) for 20x1 for the Fairmont Division. 1sh Calculate residual income for 20x1 for the Fairmont Division 20,935 $ 5,535
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Qw.15.
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 14 percent before income taxes. Fairmont's ROI has ranged from 29.2 to 32.4 percent since it was acquired.
Fairmont had an investment opportunity in 20x1 that had an estimated ROI of 28 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 $18,900,000 at the end of 20x1, a 5
percent increase over the balance at the beginning of the year.
FAIRMONT DIVISION
Income Statement
For the Year Ended December 31, 20x1
(in thousands)
Sales revenue
Cost of goods sold
Gross margin
Operating expenses:
$ 5,280
$ 68,070
41,600
$ 26,470
Administrative
Selling
Income from operations before income taxes
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.
15,655
20,935
$ 5,535
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