Carrington Co. operates its two divisions as investment centers. Information about these divisions follows.

a. What is the residual income of each division if the €˜€˜charge€™€™ on invested assets is 13 percent? Which division is doing a better job?
b. If the only change expected for next year is a sales increase of 20 percent, what will be the residual income of each division? Which division will be doing a better job financially?
c. Why were the percentage changes in residual income determined in (b) so different for Divisions 1 and2?

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Division 1 Division 2 Sales Total variable costs Total fixed costs Average assets invested $5,200,000 2,630,000 490,000 7,180,000 $1,850,000 330,000 840,000 875,000