Larson Company has two divisions. The following is information about these divisions over the past six months:

Required:
1. Use the above information to calculate the economic profit for the two divisions.
2. Interpretive Question: The division manager for Division M asks you why it is appropriate to include holding costs in the calculation of economic profit. Since holding costs are not included in the audited income statements that are reported by the company to its shareholders, then why would it be appropriate to use this cost in the internal reports that are used to evaluate managers and divisions? How would yourespond?

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Division M Division L Net operating profit Average investment Annual cost of capital $390,000 $35,000 12% $400,000 $200,000 18%