why were the percentage changes in residual income determined in b so different for 645286
(RI) London Ltd. operates its two divisions as investment centers. Information about these divisions follows.
Division 1 |
Division 2 |
|
Sales |
$4,200,000 |
$1,200,000 |
Total variable costs |
2,520,000 |
300,000 |
Total fixed costs |
500,000 |
700,000 |
Average assets invested |
6,100,000 |
1,100,000 |
a. What is the residual income of each division if the “charge” on invested assets is 13 percent? Which division is doing a better job?
b. If the only change expected for next year is a sales increase of 20 percent, what will be the residual income of each division? Which division will be doing a better job financially?
c. Why were the percentage changes in residual income determined in (b) so different for Divisions 1 and 2?