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% with a 30% tax rate. Selected operating data for three divisions of the company follow. 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 79,600
1) Compute the return on investment for each division.
2) Compute the residual income for each division.

                                           Trucking            Seafood          Construction

                                           division              division           division

Sales                                 $1,250,000        $800,000       $950,000

Net operating income        $146,250          $52,800          $79,600

Income taxes                       ($43,875)         ($15,840)        ($23,880)  

Net income                           $102,375         $36,960          $55,720

Operating assets                $650,000        $300,000       $400,000

rrr x operating assets           $65,000          $30,000         $40,000    

1) ROI                                       15.75%              12.32%             13.93%

(net income/investment)

2) Residual income               $81,250           $22,800         $39,600

operating income - (rrr x operating assets)

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