Watkins Associated Industries is a highly diversified company with three divisio
ID: 2479877 • Letter: W
Question
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.
(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.
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 63,000Explanation / Answer
Return on Investment = Net Income/Operating Assets Trucking Seafood Construuction Operating Assets 600000 250000 350000 Net Operating Income 116000 66000 63000 ROI 116000/600000 66000/250000 63000/350000 19.33% 26.40% 18% Residual Income Net Operating Income 116000 66000 63000 Minimum Level 60000 25000 35000 (600000*10%) (250000*10%) (350000*10%) Residual Income 56000 41000 28000
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