RI) Parkson Ltd. operates its two divisions as investment centers. Informa¬ tion about these divisions is shown below.

a. What is the residual income of each division if the “charge” on invested assets is 12 percent? Which division is doing a better job?

b. If the only change expected for next year is a sales increase of 22 per¬ cent, 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? LO.1

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Division 1 Division 2 $1,200,000 Sales Total variable costs Total fixed costs Average assets invested $2,100,000 1,260,000 250,000 3,050,000 300,000 700,000 1,100,000