[The following information applies to the questions displayed below.] Wyalusing

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[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 (ROl) as a performance measure with investment defined as average productive assets. Management bonuses are based in part on ROl. All investments are expected to earn a minimum return of 12 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 ROl 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 $27,300,000 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) $63,990 33,600 $30, 390 Sales revenue Cost of goods sold Gross margin Operating expenses: Administrative Selling S 4,480 17,915 22,395 7,995 Income from operations before income taxes

Explanation / Answer

1.a.

ROI=Income /invested capital

Average invested capital:

Capital in the beginning=$27,300,000/1.05=$26,000,000

Capital at end=$27,300,000

Average capital=(26,000,000+$27,300,000)/2=$26,650,000

ROI=$7,995,000/26,650,000

=30%

B. Average productive asset=$26,650,000

Inputed interest rate=12%

Inputed interest charge=26,650,000×12%

=$3,198,000

Residual income=income from operation before tax-inputed interest charge

=$7,995,000-$3,198,000

=$4,797,000

2. Yes.As it give positive residual income of $4,797,000

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