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 $ 750,000 $ 900,000
Operating assets 600,000 250,000 350,000
Net operating income 116,000 66,000 63,000
(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 income Trucking Seafood Construction
Net operating income
Minimum level
Residual income

Answer 1

Answer:

a)  ROI =  Net operating income / Operating assets

Computation of ROI of each division  

      Division              Working                        ROI

Trucking ROI        $116,000 / $600,000 0.1933 or 19.33 %

Seafood ROI        $66,000 / $250,000 0.264 or 26.40 %

Construction ROI $63,000 / $350,000 0.18 or 18 %

b) Residual Income = Net operating Income - ( Operating Asssts * Desired ROI )

Where , Minimum level = ( Operating Asssts * Desired ROI )  

Minimum level for Trucking = ($600,000*10 %) = $60,000

Minimum level for Seafood = ($250,000*10 %) = $25,000

Minimum level for Construction = ($350,000 * 10 %) = $35,000

Computation of Residual Income for each division

       Details                 Trucking($)   Seafood($)   Construction($)

Net operating income  116,000        66,000           63,000

Minimum level          60,000          25,000            35,000

Residual income             56,000        41,000            28,000