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	$1,200,000	$780,000	$900,000
Operating assets	600,000	260,000	330,000
Net operating income	101,000	60,000	62,000

(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

Answer (a)

ROI = (Net operating income / Operating assets)

Divisions	Working	ROI %
Trucking	$101,000 /$600,000	16.833
Seafood	$60,000 /$260,000	23.077 %
Construction	$62,000 /$330,000	18.788%

Answer( b )

Residual income = Net operating income - (Operating assets * desired rate of return )

Residual Income	Trucking	Seafood	Construction
Net operating income	$101,000	$60,000	$62,000
Minimum level (Operating assets * 10 %)	$60,000	$26,000	$33,000
Residual income	$41,000	$34,000	$29,000