ROI and Residual Income:Basic Computations Watkins Associated Industries is a hi
ID: 2520128 • Letter: R
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 Sales Operating assets Net operating income Trucking Division Seafood Division Construction Division $900,000 330,000 62,000 $1,200,000 600,000 101,000 $780,000 260,000 60,000 (a) Compute the return on investment for each division. (Round answers to three decimal places.) Trucking ROI = Seafood ROI Construction ROI = (b) Compute the residual income for each division. Residual Incom Trucking Seafood Construction Net operating income $ Minimum level 0 X Residual incomeExplanation / Answer
(A) ROI =Net operating Income*100/ operating assets
Trucking= 101000*100/600000=16.833%
Seafood = 60000*100/260000=23.077%
Construction= 62000*100/330000=18.788%
(B) Residual income
Minimum level= desired rate of return*operating assets
Desired rate= 10(1-0.3)=7%
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Trucking Seafood Construction Net operating income 101000 60000 62000 Minimum level* 7%*600000 =42000 7%*260000 =18200 7%*330000= 23100 Residual income 59000 41800 38900Related Questions
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