Question

For many years, Lawton Industries has manufactured prefabricated houses where the houses are constructed in sections to be assembled on customers’ lots. The company expanded into the precut housing market in 2006 when it acquired Presser 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. Lawton decided to maintain Presser’s separate identity and, thus, established the Presser Division as an investment center of Lawton.

              Lawton uses return on average investment (ROI) as a performance measure the investment defined as operating assets employed. Management bonuses are based in part on ROI. All investments in operating assets are expected to earn a minimum return of 15% before income taxes. Presser’s ROI has ranged from 19.3% to 22.1% since it was acquired in 2006. The division had an investment opportunity in the year just ended that had an estimated ROI of 18%, but Presser’s management decided against the investment because it believed the investment would decrease the division’s overall ROI.

              Presser’s operating statement for the year just ended is presented next. The division’s operating assets employed were $12,600,000 at the end of the year, a 5% increase over the balance at the end of the previous year.

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                                                          Presser Division Operating Statement

                                                                  For the year ended Dec. 31

                                                                             ($000 omitted)

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              Sales Revenue                                                                                                                   $24,000

              Cost of Goods Sold                                                                                                              15,800

                   Gross Profit                                                                                                                      $8,200

              Operating Expenses

              Administrative                                                                          $2,140

              Selling                                                                                         3,600                              5,740

              Income from operations

                   Before income taxes                                                                                                      $2,460

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Calculate these performance measures for the year just ended for the Presser Division of Lawton Industries:

1. Return on average investment in operating assets employed (ROI).
2. Residual income calculated on the basis of average operating assets employed.
3. Presser Division is a separate investment center with Lawton Industries. Identify and describe the items Presser must control if it is to be evaluated fairly by either the ROI or residual income performance measures.

Answer 1