ROI and Residual Income: Basic Computations Watkins Associated Industries is a h
ID: 2564497 • Letter: R
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 15 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.)
(b) Compute the residual income for each division.
Trucking Division Seafood Division Construction Division Sales $ 1,250,000 $ 800,000 $ 950,000 Operating assets 650,000 300,000 400,000 Net operating income 146,250 52,800 79,600Explanation / Answer
Answer a)
ROI = Net operating income / Operating assets
Computation of ROI of each division
Answer b)
Residual Income = Net operating Income - ( Operating Asssts * Desired ROI )
where , Minimum level = ( Operating Asssts * Desired ROI )
Minimum level for Trucking = ($650,000 *15 %) = $97,500
Minimum level for Seafood = ($300,000 *15 %) = $45,000
Minimum level for Constrution = ($400,000 *15 %) = $60,000
Computation of Residual Income for each division
Division Working ROI Trucking ROI $146,250 / $650,000 0.225 or 22.50 % Seafood ROI $52,800 / $300,000 0.176 or 17.60 % Construction ROI $76,600 / $400,000 0.1915 or 19.15 %Related Questions
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