*P10-7B Walton Industries has manufactured prefabricated garages for over 20 years. The garages are constructed in sections to be assembled on customers’ lots. Walton expanded into the precut housing market when it acquired Washington Enterprises, one of its sup- pliers. In this market, various types of lumber are precut into the appropriate lengths, banded into packages, and shipped to customers’ lots for assembly. Walton designated the Washington Division as an investment center.

Walton uses return on investment (ROI) as a performance measure, with investment defined as average operating assets. Management bonuses are based in part on ROI. All investments are expected to earn a minimum rate of return of 15%. Washington’s ROI has ranged from 19.9% to 23.3% since it was acquired. Washington had an investment op- portunity in 2014 that had an estimated ROI of 18%. Washington’s management decided against the investment because it believed the investment would decrease the division’s overall ROI.

Selected financial information for Washington is presented below. The division’s average operating assets were $7,500,000 for the year 2014.

 

Washington Division Selected Financial Information

For the Year Ended December 31, 2014

 

 

Sales	$16,000,000
Contribution margin	5,600,000
Controllable margin	1,500,000

 

 

 

Instructions

(a)  Calculate the following performance measures for 2014 for the Washington Division.

(1)   Return on investment (ROI).

(2)   Residual income.

(b)  Would the management of Washington have been more likely to accept the investment opportunity it had in 2014 if residual income were used as a performance measure instead of ROI? Explain your answer.

 

 

PROBLEMS: SET C

 

Visit the book’s companion website, at www.wiley.com/college/weygandt, and choose the Student Companion site to access Problem Set C.

 

WATERWAYS CONTINUING PROBLEM

 

(Note: This is a continuation of the Waterways Problem from Chapters 1–9.)