Walton Industries has manufactured prefabricated garages for over 20 years. The garages are constructed in sections to
Question:
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 suppliers. 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 16%. Washington Enterprises’s ROI has ranged from 19.9% to 23.3% since it was acquired. Washington had an investment opportunity in 2012 that had an estimated ROI of 19%. Washington’s management decided against the investment because it believed the investment would decrease the division’s overall ROI.
Selected financial information for Washington Enterprises is presented below. The division’s average operating assets were $7,600,000 for the year 2012.
Instructions
(a) Calculate the following performance measures for 2012 for the Washington Enterprises Division.
(1) Return on investment (ROI).
(2) Residual income.
(b) Would the management of Washington Enterprises have been more likely to accept the investment opportunity it had in 2012 if residual income were used as a performance measure instead of ROI? Explain your answer.
Step by Step Answer:
Accounting Tools For Business Decision Making
ISBN: 9780470534786
4th Edition
Authors: Paul D. Kimmel, Jerry J. Weygandt, Donald E. Kieso