(RI) Northwest Real Estate Management has two divisions that are operated as investment centers. Information about these divisions is shown below.

a. What is the residual income of each division if the “charge” on invested assets is 10 percent? Which division is doing a better job?

b. If the only change expected for next year is a sales increase of 15 percent, 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?

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DIVISION 1 Sales $1,200,000 Total variable costs 300,000 DIVISION 2 $2,100,000 1,435,000 Total fixed costs 700,000 250,000 Average assets invested 1,100,000 3,050,000