Countrywide Cable & Wyalusing Industries

1)Countywide Cable Services, Inc. is organized with three segments: Metro, Suburban, and Outlying.

 

Data for these segments for the year just ended follow.

 

Metro Suburban Outlying

 

Service revenue ……………………………………………………………….. $1,000,000 $800,000 $400,000

 

Variable expenses …………………………………………………………….. 200,000 150,000 100,000

 

Controllable fixed expenses ………………………………………………… 400,000 320,000 150,000

 

Fixed expenses controllable by others …………………………………… 230,000 200,000 90,000

 

In addition to the expenses listed above, the company has $95,000 of common fixed expenses.

 

Income-tax expense for the year is $145,000.

 

Required:

 

1. Prepare a segmented income statement for Countywide Cable Services, Inc. Use the contribution

 

format.

     

2)Wyalusing Industries has manufactured prefabricated houses for over 20 years. The houses are constructed

 

in sections to be assembled on customers’ lots. Wyalusing 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.

 

Wyalusing designated the Fairmont Division as an investment center. Wyalusing 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 20×1 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 20×1 income statement for Fairmont Division follows. The division’s productive assets were

 

$12,600,000 at the end of 20×1, a 5 percent increase over the balance at the beginning of the year.

 

FAIRMONT DIVISION

 

Income Statement

 

For the Year Ended December 31, 20×1

 

(in thousands)

 

Sales revenue ………………………………………………………………………………………………………………………………. $24,000

 

Cost of goods sold …………………………………………………………………………………………………………………………. 15,800

 

Gross margin ……………………………………………………………………………………………………………………………. $ 8,200

 

Operating expenses:

 

Administrative ……………………………………………………………………………………………………………. $2,140

 

Selling ………………………………………………………………………………………………………………………. 3,600 5,740

 

Income from operations before income taxes ………………………………………………………………………………………. $ 2,460

 Required: 

1. Calculate the following performance measures for 20×1 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 20×1 if residual income were used as a performance measure instead of ROI?

 

Explain your answer.