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    ROI and Residual Income - Wyalusing Industries

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    Wyalusing Industries manufactured prefabricated house. They expanded into pre-cut housing when it acquired Fairmont. Wyalusing uses ROI as a performance measure with investment defined as average productive assets. Management bonuses are based in part of the return on investment (ROI). 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 % since it was acquired. Fairmont had an investment opportunity in 20x1 that had an estimated ROI of 18%. However, they decided against the investment because they felt it would decrease the overall ROI.

    The 20x1 income statement for Fairmont division is as follows.
    The division productive assets were $12,600,000 at the end of 20x1 a 5% increase over the beginning of the year balance.

    Fairmont Division
    Income Statement
    Year ended 12/31/20x1
    Sales revenue - $24,000,000
    Cost of good sold $15,800,000
    Gross Margin $8,200,000

    Operating expenses
    Administrative $2,140,000
    Selling $3,600,000
    Total $5,740,000

    Income from operations before income taxes - $2,460,000

    1. Calculate ROI and Residual Income.
    2. Show how the solution will change if income from operations was $2,700,000

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    Solution Summary

    This solution provides guidelines on calculating the return on investment and residual income.