Mara Brewing Supply Inc. expects its divisions to earn a minimum rate of return of 10%. One of its divisions, BC Bottling, is an investment centre that manufactures glass bottles. The division has average operating assets of 1,430,000 and achieved the following results in the current year:

BC Bottling - Income Statement

Sales		$750,000
Operating expenses:		350,000
Net operating income		400,000

Required:

a) Calculate the return on investment for BC Bottling division for the current year. (1 mark)

b) How might the division improve its return on investment? Consider the two components of calculating the return on investment. (1 mark)

c) Calculate the residual income for the BC Bottling division for the current year. (2 marks)

d) An investment opportunity is available to BC Bottling that would require an investment of $500,000 in new average operating assets and earn net operating income of $70,000.

i) Would the management of BC Bottling likely accept the investment opportunity if they are evaluated based on the current return on investment of the division? Show calculations and explain. (2 marks)

ii) Would the management of BC Bottling likely accept the investment opportunity if they are evaluated based on residual income? Show calculations and explain. (2 marks)