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Walton Industries 20 years

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Walton Industries has manufactured prefabricated garages for over 20 years. The
garages are constructed in sections to be assembled on customers’ lots. Walton expanded
into the precut housing market when it acquired Washington Enterprises, 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. Walton designated the
Washington Division as an investment center.

Walton uses return on investment (ROI) as a performance measure, with investment
defined as average operating assets. Management bonuses are based in part on ROI. All
investments are expected to earn a minimum rate of return of 15%. Washington’s ROI has
ranged from 19.9% to 23.3% since it was acquired. Washington had an investment opportunity
in 2014 that had an estimated ROI of 18%. Washington’s management decided
against the investment because it believed the investment would decrease the division’s overall ROI.

Selected financial information for Washington is presented below. The division’s average
operating assets were $7,500,000 for the year 2014.

Washington Division
Selected Financial Information
For the Year Ended December 31, 2014
Sales   16,000,000
Contribution margin  5,600,000
Controllable margin  1,500,000

Calculate the following performance measures for 2014 for the Washington Division.
(1) Return on investment (ROI).
(2) Residual income.

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