Required information [The following information applies to the questions display

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Required information [The following information applies to the questions displayed below.] 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 16 percent before income taxes. Fairmont's ROI has ranged from 29.4 to 32.6 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 ROl. The 20x1 income statement for Fairmont Division follows. The division's productive assets were $14,700,000 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 $63,610 40,600 $23,010 Gross margin Operating expenses: $ 5,180 Administrative Selling 13,525 18,705 Income from operations before income taxes $ 4,305

Explanation / Answer

Return on Investment = Net Profit/Total Investment * 100

= $4,305/$14,700,000 * 100 = 0.0292

Residual Income (RI) = A ? (B × C)

In the above formula,
   A = Department's net operating income;
   B = Minimum required return on assets; and
   C = Average operating assets of the department

RI = $4,305 - (28%*14,350,000) = $4,013,695

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