Required informatio [The following information applies to the questions displaye

Question

Required informatio [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 14 percent before income taxes. Fairmont's ROl has ranged from 19.5 to 22.7 percent since it was acquired. Fairmont had an investment opportunity in 20x1 that had an estimated ROl of 18 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 $44,100,000 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 $69,220 37,600 $31,620 Gross margin Administrative Selling Operating expenses: $4,880 18,130 23,010 8,610 Income from operations before income taxes

Explanation / Answer

1 A. Return on investment = Income before income taxes / (average value of assets)

here,

end of year assets = $44,100,000

this is 5 % more than beginning assets

=> beginning assets * 105% = $44,100,000.

=> beginning assets = $44,100,000 / 105%

=>$42,000,000.

average assets =( beginning assets + closing assets ) / 2

=> ($42,000,000 + $44,100,000) / 2

=>$43,050,000.

now,

Return on investment = $8,610,000 / 43,050,000 *100

=>20%.

1-b residual income = income - (required return * average assets)

=> $8,610,000 - (14% * $43,050,000)

=>$2,583,000.

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.