Cal Engineering has two divisions that are operated as investment centers. Information about these divisions is shown below.
|
Division 1 |
Division 2 |
|
|
Sales |
$600,000 |
$1,050,000 |
|
Total variable costs |
150,000 |
717,500 |
|
Total fixed costs |
350,000 |
125,000 |
|
Average assets invested |
550,000 |
1,525,000 |
a. What is the residual income of each division if the “charge” on invested assets is 10 percent? Which division is doing a better job?
b. If the only change expected for next year is a sales increase of 15 percent, what will be the residual income of each division? Which division will be doing a better job financially?
c. Why did the answers to the second questions in parts (a) and (b) differ?