Scotty Industries has manufactured prefabricated garages for over 20 years. The garages are constructed in sections to be assembled on customers’ lots. Scotty expanded into the precut housing market when it acquired Federation Enterprises, 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. Scotty designated the Federation Division as an investment center.
Scotty 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%. Federation Enterprise’s ROI has ranged from 19.9% to 23.3% since it was acquired. Federation had an investment opportunity in 2011 that had an estimated ROI of 19%. Federation’s management decided against the investment because it believed the investment would decrease the division’s overall ROI.
Selected financial information for Federation Enterprises is presented below. The division’s average operating assets were $7,600,000 for the year 2011.
FEDERATION ENTERPRISES DIVISION
Selected Financial Information
For the Year Ended December 31, 2011
Sales ......... $16,000,000
Contribution margin ... 5,600,000
Controllable margin ... 1,500,000

Instructions
(a) Calculate the following performance measures for 2011 for the Federation Enterprises Division.
(1) Return on investment (ROI).
(2) Residual income.
(b) Would the management of Federation Enterprises 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.