Oatley Fabrics Company has two retail divisions, which reported the following results for last year:

Furnishing DivisionDressmaking Division

Profit…………………………………..$1,350,000……………………….$300,000

Average invested capital………………$9,000,000…………………….$1,500,000

ROI…………………………………………..15%…………………………….20%

Required:

1. Which was the more successful division? Think carefully about this, and explain your answer.

2. Calculate each division’s residual Income under each of the following assumptions about the firm’s minimum required rate of return:

(a) 12 per cent.

(b) 15 per cent.

(c) 18 per cent.



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