ROI and Residual Income: Basic ComputationsWatkins 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 DivisionSeafood DivisionConstruction DivisionSales$ 1,200,000$ 750,000$ 900,000Operating assets600,000250,000350,000Net operating income116,00066,00063,000 (a) Compute the return on investment for each division. (Round answers to three decimal places.)Trucking ROI =AnswerSeafood ROI =AnswerConstruction ROI =Answer (b) Compute the residual income for each division.Residual incomeTruckingSeafoodConstructionNet operating incomeAnswerAnswerAnswerMinimum levelAnswerAnswerAnswerResidual incomeAnswerAnswerAnswer

ROI stands for Return on Investment, which is a ratio used for computing the profitability of the investment as the percentage of the cost. It is expressed as percentage and used for comparing the profitability of various investments and investment kinds. a. The formula to compute the ROI as: ROI = Net operating incomeOperating assets Computing ROI for each division as: Division Working ROI Trucking ROI $116,000$600,000 19.33% Seafood ROI $66,000$250,000 26.40% Construction ROI $63,000$350,000 18% b. The formula to compute residual income as: Residual Income = Net operating Income - Minimum level where Minimum level=(Operating Asssts ×Desired ROI ) Computing the minimum level for every division as: For Trucking Minimum level =$600,000 ×10 %=$60,000 For Seafood Minimum level =$250,000 ×10 %=$25,000 For Construction Minimum level =$350,000 ×10 %=$35,000 Computation of Residual Income for each division as: 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

Answered: Watkins Associated Industries is a…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

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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 =	Answer
Seafood ROI =	Answer
Construction ROI =	Answer

(b) Compute the residual income for each division.

Residual income	Trucking	Seafood	Construction
Net operating income	Answer	Answer	Answer
Minimum level	Answer	Answer	Answer
Residual income	Answer	Answer	Answer

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