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.

	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

(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.

Residual Income	Trucking	Seafood	Construction
Net operating income	$Answer	$Answer	$Answer
Minimum level	Answer	Answer	Answer
Residual income	$Answer	$Answer	$Answer

Answer 1

a )   

	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 %

b )

RESIDUAL INCOME

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

DETAILS	TRUCK DIV.	SEAFOOD DIV.	CONSTRUCTION DIV.
NET OPERATING INCOME	99000	58000	57000
DESIRED RETURN	10%	10%	10%
OPERATING ASSETS	500000	230000	380000
RESIDUAL INCOME	99000 - (10% * 500000) = 49000	58000 - (10% * 230000) = 35000	57000 - (10% * 230000) = 34000