Last years results for the Oak Division of Forest Company are:

Average operating assets $250,000

Operating profit 45,000

Sales 300,000

The required cost of capital for Forest Company is 15%.

Required: Answer the following questions:

1. Compute the residual income for the Oak Division.

2. Compute the return on investment for the Oak Division.

3. Calculate the profit margin ratio and asset turnover ratio for Oak Division using the original numbers.

4. Would Oak Division choose to increase profit by $20,000 from an investment of $125,000 if it is evaluated using return on investment? If it was evaluated based on residual income? Explain your answer.

5. Suppose instead of making additional investments, Oak Division could increase its profit margin ratio by one percent (for example from 12% to 13%) by cutting costs without increasing either sales or investment, what would be the new return on investment?