Required information

[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 14 percent before income taxes. Fairmonts ROI has ranged from 29.2 to 32.4 percent since it was acquired. Fairmont had an investment opportunity in 20x1 that had an estimated ROI of 28 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 $18,900,000 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

$

68,070

Cost of goods sold

41,600

Gross margin

$

26,470

Operating expenses:

Administrative

$

5,280

Selling

15,655

20,935

Income from operations before income taxes

$

5,535

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.

Return on investment

%

Residual income