orton industries has manufactured prefabricated houses for over 273380

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

Orton 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 16%. Urbina’s ROI has ranged from 20.1% to 23.5% since it was acquired. Urbina had an investment opportunity in 2011 that had an estimated ROI of 19%. Urbina’s management decided against the investment because it believed the investment would decrease the division’s overall ROI.

Selected financial information for Urbina are presented below. The division’s average operating assets were $12,300,000 for the year 2011.

URBINA DIVISION

Selected Financial Information

For the Year Ended December 31, 2011

Sales ………………. $26,000,000

Contribution margin …. 9,100,000

Controllable margin ….. 2,460,000

Instructions

(a) Calculate the following performance measures for 2011 for the Urbina Division.

(1) Return on investment (ROI).

(2) Residual income.

(b) Would the management of Urbina Division have been more likely to accept the investment opportunity it had in 2011 if residual income were used as a performance measure instead of ROI? Explain your answer.