Problem - Winona Industries has manufactured prefabricated houses for over 10 years. The houses are constructed in sections to be assembled on customers' lots. Winona 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. Winona 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 15 percent before income taxes. 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. The 20x1 income statement for Fairmont Division follows.
FAIRMONT DIVISION Income Statement For the Year Ended December 31, 20x1 (in thousands)
Sales revenue_______________________________$24,000
Cost of goods sold___________________________ $15,800
Gross margin________________________________$ 8,200
Operating expenses:
Administrative______________________$2,140
Selling____________________________$3,600 $5,740
Income from operations before income taxes________$2,460
Required: Calculate the following performance measures for 20x1 for the Fairmont Division.
a. Return on investment (ROI).
b. Residual income.