Sawtell Industries has manufactured prefabricated houses for over 20 years. The houses are constructed in sections to be assembled on customers' lots. Sawtell expanded into the precut housing market when it acquired Baron 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. Sawtell designated the Baron Division as an investment center. Sawtell 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%. Baron's ROI has ranged from 19.3% to 22.1% since it was acquired. Baron had an investment opportu- nity in 2002 that had an estimated ROI of 18%, Baron's management decided against the investment because it believed the investment would decrease the division's overall ROI. Selected financial information for Baron are presented below. The division's average operating assets were $12,300,000 for the year 2002.

Instructions

(a) Calculate the following performance measures for 2002 for the Baron Division. (1) Return on investment (ROI).

(b) (2) Residual income. Would the management of Baron Division have been more likely to accept the investment opportunity it had in 2002 if residual income were used as a performance measure instead of ROI? Explain your answer

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BARON DIVISION Selected Financial Information For the Year Ended December 31, 2002 Sales Contribution margin Controllable margin $24,000,000 8,200,000 2,460,000