Question:
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?