London Ltd. 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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Sales Total variable costs Total fixed costs Average assets invested Division 1 $4,200,000 2,520,000 500,000 6,100,000 Division 2 $1,200,000 300,000 700,000 1,100,000