Haniwall Industries has manufactured prefabricated houses for over 20 years.
The houses are constructed in sections that are assembled on customers' lots. Haniwall expanded into the precut housing market when it acquired Miramichi 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. Haniwall designated the Miramichi division as an investment centre.
Haniwall uses the return on investment as a performance measure and defines investment as the average operating assets. Management bonuses are based in part on the ROI. All investments are expected to earn a minimum rate of return of 17%. Miramichi's ROI has ranged from 21.9% to 23.3% since it was acquired. Miramichi had an investment opportunity in 2012 that had an estimated ROI of 19%. Miramichi's management decided against the investment because it believed the investment would decrease the division's overall ROI.
Selected financial information for Miramichi is presented below. The division's average operating assets were $7.5 million for the year 2012.
MIRAMICHI DIVISION
Selected Financial Information
Year Ended December 31, 2012
Sales.................................................................$16,000,000
Contribution margin..................................................5,600,000
Controllable margin...................................................1,500,000
Instructions
(a) Calculate the following performance measures for 2012 for the Miramichi division:
(1) Return on investment, and
(2) Residual income.
(b) Would the management of the division have been more likely to accept the investment opportunity it had in 2012 if residual income had been used as a performance measure instead of the ROI? Explain your answer.