Return on Investment and Residual Income

Simonsen Structural Engineers provides engineering consulting services to clients engaged in major commercial construction projects. The company expanded into the wastewater treatment market when it acquired Scott Industries. Scott Industries fabricates equipment used in wastewater treatment plants. Simonsen decided to maintain Scotts 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 24% before income taxes. V-Sheds ROI has ranged from 24% to 27% since it was acquired.

V-Sheds operating statement for the year just ended is presented below. The divisions operating assets employed were $46,200,000 at the end of the year, a 5% increase over the balance at the end of the previous year.

Calculate the following performance measures for the year just ended for the Scott Division of Simonsen Structural Engineers: a. Return on average investment in operating assets employed (ROI). Round percent to one decimal place.

b. Residual income calculated on the basis of average operating assets employed. Round amount to nearest dollar.

\begin{tabular}{|c|c|c|} \hline \multicolumn{3}{|c|}{\begin{tabular}{c} Scott Division Operating Statement \\ For the Year Ended December 31 \\ (\$000 omitted) \end{tabular}} \\ \hline Sales revenue & & $55,000 \\ \hline Cost of goods sold & & 28,000 \\ \hline Gross profit & & 27,000 \\ \hline \multicolumn{3}{|l|}{ Operating expenses } \\ \hline Administrative & $8,800 & \\ \hline Selling & 6,600 & 15,400 \\ \hline Income from operations before income taxes & & $11,600 \\ \hline \end{tabular}