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
Minimum level
Residual income

Answer 1

Answer:-

Particulars	Trucking Division	Sea Food Division	Construction Division
Sales	12,00,000	7,80,000	9,00,000
Operating Assets	6,00,000	2,60,000	3,30,000
Net Operating Income	1,01,000	60,000	62,000
Return of Income	0.17	0.23	0.19
(Net operating income / Operating assets)
Desired ROI	10%	10%	10%
Minimum Level	60,000	26,000	33,000
(Operating Assets X
Desired ROI)
Residual Income	41,000	34,000	29,000
(NOI-Minimum Level)