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	$1,000,000	$690,000	$900,000
Operating assets	500,000	230,000	380,000
Net operating income	99,000	58,000	57,000

(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.

Net operating income .

Minimum level

Residual income