ROI and Residual Income:Basic Computations Watkins Associated Industries is a hi

Question

ROI and Residual Income:Basic Computations

Watkins Associated Industries is a highly diversified company with three divisions: Trucking, Seafood, and Construction. Assume that the company uses return on investment and residual income as two of the evaluation tools for division managers. The company has a minimum desired rate of return on investment of 10 percent with a 30 percent tax rate. Selected operating data for three divisions of the company follow.

(a) Compute the return on investment for each division. (Round answers to three decimal places.)
Trucking ROI = Answer
Seafood ROI = Answer
Construction ROI = Answer

(b) Compute the residual income for each division.

Trucking Division Seafood Division Construction Division Sales $1,000,000 $690,000 $900,000 Operating assets 500,000 230,000 380,000 Net operating income 99,000 58,000 57,000

Explanation / Answer

Answer

a )   

b )

RESIDUAL INCOME

= NET OPERATING INCOME - (DESIRED RATE OF RETURN * OPERATING ASSET)

99000 - (10% * 500000) = 49000

58000 - (10% * 230000) = 35000

57000 - (10% * 230000) = 34000

TRUCK DIV. SEAFOOD DIV. CONSTRUCTION DIV. NET OPERATING INCOME 99000 58000 57000 OPERATING ASSET 500000 230000 380000 RETURN ON INVESTMENT 19.8 % 25.217 % 15 %

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