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MCS,PHD
Argosy University/ Phoniex University/
Nov-2005 - Oct-2011
Professor
Phoniex University
Oct-2001 - Nov-2016
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 15 percent
before income taxes. Fairmont’s ROI has ranged from 19.3 to 22.1 percent since it was acquired. Fairmont
had an investment opportunity in 20x1 that had an estimated ROI 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
$12,600,000 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 ................................................................................................................................................. $24,000
Cost of goods sold ........................................................................................................................................... 15,800
Gross margin .............................................................................................................................................. $ 8,200
Operating expenses:
Administrative ............................................................................................................................ $2,140
Selling ........................................................................................................................................ 3,600 5,740
Income from operations before income taxes .................................................................................................... $ 2,460
¦Exercise 13–26
Residual Income
(LO 2)
¦Exercise 13–27
Calculate Weighted-Average
Cost of Capital for EVA
(LO 2)
¦Exercise 13–28
Economic Value Added (EVA);
Continuation of Preceding
Exercise
(LO 2)
¦Exercise 13–29
ROI; Residual Income
(LO 1, 2)
578Chapter 13Investment Centers and Transfer Pricing
Required:
1.Calculate the following performance measures for 20x1 for the Fairmont Division.
a.Return on investment (ROI).
b.Residual income.
2.Would the management of Fairmont Division have been more likely to accept the investment
opportunity it had in 20x1 if residual income were used as a performance measure instead of ROI?
Explain your answer.
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