Colleen Barry is the general manager of Whitten Industries' Industrial Products division. The division is treated as an investment center, and Colleen's performance is measured using residual income. In preparing the forecast for next year, Colleen assumes the division will generate $30 million in revenue using average operating assets of $19 million. The required minimum rate of return is 15%.
a. If Colleen wants the division to achieve $2 million in residual income, what is the maximum amount of operating expenses the division can incur to achieve that target?
b. If Colleen doesn't believe she can control expenses to the level calculated in part (a), what action should she take?