a for-proht hospital f. The outpatient clinic in g. The Mayor\'s Office in a lar

Question

a for-proht hospital f. The outpatient clinic in g. The Mayor's Office in a large city Winona Industries has manufactured prefabricated houses for over 10 years. The houses are constructed in sections to be assembled on customers' lots. Winona 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. Winona designated the Fairmont 5. ion as an investment center. Wyalusing uses return on investment (ROI) as a performance measure with bonuses are based in part on ROI. All investments are expected to earn a minimum return of 15 percent before income taxes. 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. The 20x1 income statement for Fairmont Division follows. investment defined as average productive assets. Management FAIRMONT DIVISION Income Statement For the Year Ended December 31. 20x1 $24,000 15,800 S 8,200 Sales revenue Cost of goods sold Gross margin Operating expenses: Administrative S2,140 Selling 3,600 5,740 Income from operations before income taxes 2,460 Required: Calclae th following performane meaures for 20x1 for he Fairmont Division a. Return on investment (ROI). b.. Residual income.

Explanation / Answer

Average operating asset ;

Ending assets = 12600000

Beginning assets = 12600000*100/105 = 12000000

Average operating assets = (12000000+12600000/2) = 12300000

a) Return on investment = Net income*100/average operating assets

= 2460000*100/12300000

Return on investment = 20%

b) Residual income = Actual operating income-Minimum operating income

= 2460000-(12300000*15%)

Residual income = 615000

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