Suburban Lifestyles, Inc. has manufactured prefabricated houses for over 20 years

13-29 Suburban Lifestyles, Inc. has manufactured prefabricated houses for over 20 years. The houses are constructed in sections to be assembled on customers’ lots. Suburban Lifestyles 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. Suburban Lifestyles’ management designated the Fairmont Division as an investment center. Suburban 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. Fairmont’s ROI has ranged from 19.3 to 22.1 percent since it was acquired. Fairmont had an investment opportunity in 20x1 that had an estimated ROI of 18 percent. Fairmont’s management decided against the investment because it believed the investment would decrease the division’s overall ROI. The 20x1 income statement for Fairmont Division follows. The division’s productive assets were $25,200,000 at the end of 20x1, a 5 percent increase over the balance at the beginning of the year.

FAIRMONT DIVISION
Income Statement
For the Year Ended December 31, 20x1
(in thousands)
Sales revenue $48,000
Cost of goods sold 31,600
Gross margin $16,400
Operating expenses:
Administrative $4,280
Selling 7,200 11,480
Income from operations before income taxes $ 4,920

Required:
1. Calculate the following performance measures for 20x1 for the Fairmont Division.
a. Return on investment (ROI).
b. Residual income.
2. Would the management of Fairmont Division have been more likely to accept the investment opportunity it had in 20x1 if residual income were used as a performance measure instead of ROI? Explain your answer.
3. Build a spreadsheet: Construct an Excel spreadsheet to solve requirements


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Ed Koehler started Great Southern Furniture five years ago to assemble prefabricated bedroom furniture for large hotel chains

P 12–15: Great Southern Furniture

Ed Koehler started Great Southern Furniture five years ago to assemble prefabricated bedroom furniture for large hotel chains. Hotels purchase furniture (beds, night stands, and chests of drawers) from manufacturers who ship the furniture to the hotels unassembled. Koehler sends a site supervisor and a small crew of employees to the hotel. The site supervisor first hires additional local employees to help assemble the furniture and then trains them. The locally hired employees along with the small crew of Great Southern employees assemble the furniture at the hotel. This significantly reduces the shipping charges and damage to the furniture. Before sending a crew to the site, Koehler has a crew in his office assemble several sets to make sure there are no problems and also to estimate the expected time required to assemble the particular furniture. The 500-room Hyatt opens in Tampa and Koehler sends a crew to assemble the 500 bedroom sets. He establishes that 4.5 hours are required to assemble one complete room and the estimated cost per hour is $22. Upon completing the job, the crew reports they had total wages of $49,693 for 2,170 hours worked.

Required:
Write a report evaluating the performance of the crew at the Hyatt in Tampa.

Click here for the solution: Ed Koehler started Great Southern Furniture five years ago to assemble prefabricated bedroom furniture for large hotel chains