Exercise 13-29 ROI; Residual Income (LO 13-1, 13-2)

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[The following information applies to the questions displayed below.] 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 12 percent before income taxes. Fairmonts ROI has ranged from 14.4 to 17.6 percent since it was acquired. Fairmont had an investment opportunity in 20x1 that had an estimated ROI of 13 percent. Fairmonts management decided against the investment because it believed the investment would decrease the divisions overall ROI. The 20x1 income statement for Fairmont Division follows. The divisions productive assets were $42,000,000 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				$	63,300
Cost of goods sold					37,100
Gross margin				$	26,200
Operating expenses:
Administrative	$	4,830
Selling		15,220			20,050
Income from operations before income taxes				$	6,150

Exercise 13-29 Part 1

Required: 1-a. Calculate the return on investment (ROI) for 20x1 for the Fairmont Division. 1-b. Calculate residual income for 20x1 for the Fairmont Division.