Exercise 13-29 ROI Residual Income (LO 13-1, 13-2) 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 (ROD) as a performance measure with investment defined as average productive assets. Management bonuses are based in part on ROL All investments are expected to earn a minimum return of 15 percent before income taxes. Fairmont's ROI has ranged from 19.3 to 22.1 percent since it was acquired. Fairmont had an investment opportunity in 20x I that had an estimated ROI of 18 percent. Fairmont's management decided against the investment because it believed the investment would decrease the division's overall ROL. The 20xl income statement for Fairmont Division follows. The division's productive assets were $12,600,000 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 Cost of goods sold Gross margin Operating expenses Administrative Seling Income from operations before Income taxes $24.000 15,800 $ 8.200 $2.140 3.600 5,740 $ 2,460 2. Would the management of Fairmont Division have been more likely to accept the investment opportunity it had in 20xl if residual income were used as a performance measure instead of ROM? Explain your