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ROI and Residual Income:Basic Computations Watkins Associated Industries is a highly diversified company with three divisions:...
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 |
Solutions
Expert Solution
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) |
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