Buckeye Enterprises is composed of two major divisions. Division I is a relatively new manufacturer of electronic subassemblies for the computer industry. Although its market is highly competitive, potential technological developments from the division's research staff may soon provide Division I with a new product unavailable from any other source. Because of the high risks involved, Buckeye assigns a cost of capital to Division I of \(30 \%\). Its other major segment, Division II, has been Buckeye's major source of revenue for many years. Division II manufactures automobile components that are sold primarily to Gigantic Motors Corp. Because it has no longterm debt and is relatively secure in its market, Division II is assigned a cost of capital of \(15 \%\).

Buckeye has a limited amount of capital available for re-investment, and will allocate it to the two divisions based on their performance. During the previous year, Division I earned \(\$ 600,000\) on its invested capital of \(\$ 2,400,000\). Over the same period, Division II had income of \(\$ 1,500,000\) with invested capital of \(\$ 8,000,000\).

{Required:}

Evaluate the performance of each division using:

(a) return on investment, and

(b) residual income. What other factors might affect this capital allocation decision?