Exercise 13-29 ROI; Residual Income (LO 13-1, 13-2) [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 16 percent before income taxes. Fairmont's ROI has ranged from 29.4 to 32.6 percent since it was acquired. Fairmont had an investment opportunity in 20x1 that had an estimated ROI of 28 percent. Fairmont's management decided against the investment because it believed the investment would decrease the division's overall ROI. The 20x1 income statement for Fairmont Division follows. The division's productive assets were $14,700,000 at the end of 20x1, a 5 percent increase over the balance at the beginning of the year. FAIRMON'I' DIVI S ION Income Statement For the Year Ended December 31, 20x1 (in thousands) Sales revenue $63,610 Cost of goods sold 40,600 Gross margin $23,010 Operating expenses: Administrative $ 5,130 Selling 13.525 13.705 Income from operations before income taxes $ 4,305 Exercise 13-29 Part 2 2. Would the management of Fairmont Division have been more likely to accept the investment opportunity it had in 20x1 if residual income were used as a performance measure instead of ROI? 0 Yes 0 No