Question

Oriole Industries has manufactured prefabricated houses for over 20 years. The houses are constructed in sections to be assembled on customers' lots. Oriole expanded into the precut housing market when it acquired Jensen 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 Oriole designated the Jensen Division as an investment center. Oriole 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 18.3%. Jensen's Rol has ranged from 20.0% to 22.9% since it was acquired. Jersen had an investment opportunity in 2020 that had an estimated ROI of 18.9%. Jensen management decided against the investment because it believed the investment would decrease the division's overall ROI. Selected financial information for Jensen are presented below. The division's average operating assets were $12,815,000 for the year 2020. ORIOLE INDUSTRIES Jersen Division Selected Financial Information For the Year Ended December 31, 2020 Sales $25,537.000 Contribution margin 9,044,000 Contro able margin 2.550.185 Calculate the following performance measures for 2020 for the Jensen Division. (Round Rol to 1 decimal place.cz. 15) (1) Return on investment (ROI) (2) Residual income

Answer 1

Answer:

1) Return on Investment (ROI) % = Net Profit / Total investment * 100

Controllable margin = Contribution - Fixed cost

Controllable margin can also be termed as net profit since it takes into account all the controllable cost.

ROI = $2550185/ $25537000 * 100 = 9.99%

(2) Residual Income = Operating Assets * Cost of Capital(%)

Operating Assets = $12815000

Cost of capital = 18.3%

Residual Income = $12815000* 18.3% = $2345145