Simonsen Structural Engineers provides engineering consulting services to clients engaged in major commercial construction projects. The company expanded into the wastewater treatment market in 20X1 when it acquired Scott Industries. Scott Industries fabricates equipment used in wastewater treatment plants. Simonsen decided to maintain Scott’s separate identity and, thus, established the Scott Division as an investment center of Simonsen.

Simonsen uses return on average investment (ROI) as a performance measure, with the investment defined as “operating assets employed.” All investments in operating assets are expected to earn a minimum return of 18% before income taxes. Scott’s ROI has ranged from 18% to 21% since it was acquired in 20X1.

Scott’s operating statement for the year just ended is presented below. The division’s “operating assets employed” were \($21,000,000\) at the end of the year, a 5% increase over the balance at the end of the previous year.

Required 

Calculate the following performance measures for the year just ended for the Scott Division of Simonsen Structural Engineers: (Service and Merchandising;

a. Return on average investment in operating assets employed (ROI).

b. Residual income calculated on the basis of average operating assets employed.

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Scott Division Operating Statement For the Year Ended December 31 ($000 omitted) Sales revenue.. Cost of goods sold $25,000 14,000 Gross profit.. $11,000 Operating expenses. Administrative $4,000 Selling. 3,000 7,000 Income from operations before income taxes $ 4,000