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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.

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Answer:

                                           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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