Lamington Industries has manufactured prefabricated houses for aver 20 years. The houses are constructed in sections to be assembled on customers' lots. Lamington expanded into the pre-cut housing market five years ago when it acquired Pam Company, one of its suppliers. In this market, various types of timber are pre-cut into the appropriate lengths, banded into packages. and shipped to customers lots for assembly. Lamington regards the Pam Division as an investment centre. Lamington uses return on investment (ROI) as a performance measure with investment defined as the average of the balance of the beginning and end of year assets. Management bonuses are based in part on ROI. All investments are expected to earn a minimum return of 15 per cent before income taxes. Pam's ROI has ranged from 19.3 to 22.1 per cent since it was acquired. Last year Pam had an investment opportunity that had an estimated ROI of 18 per cent. Pam's management decided against the investment because it believed the investment would decrease the division's overall PCI. The profit statement for last year for Pam Division follows. The division's productive assets were $25,200,000 at year end, a 5 per cent increase over the prior year-end balance.

Ram Division

Profit Statement for the year ended 31 December (in $'000s)

Sales revenue........................................................................$48,000

Cost of goods sold....................................................................31,600

Gross margin.........................................................................$16,400

Operating costs:

Administrative............................................................$4,280

Selling........................................................................7,200...11,480

Profit from operations before income taxes......................................$4,920

Required:

1. Calculate the following performance measures for last year for the Pam Division:

(a) Return on investment (ROI).

(b) Residual income

2. Would the management of the Pam Division have been more likely to accept the investment opportunity if residual income had been used as a performance measure instead of ROI? Explain your answer.

3. Construct an Excel® spreadsheet to solve requirement 1 above. Show how the solution will change if:

(a) Profit from operations was $5 400 000.

(b) Productive assets at year-end were $36,000,000.