Problem
Sweet Fabrics Ltd has two profit centres: a grocery store based in Hamilton, Ontario, and a second store based in St. Catherines, Ontario. Consider the following data. Hamilton, Ontario St. Catherines, Ontario Average Operating Assets $750,000 $540,000 Current Liabilities 215,000 $136,000 Operating Income 90,000 82,080 Total Capital Employed 320,000 265,000 Minimum Required Rate of Return 15.0% 15.0%
1. Calculate the return on investment (ROI) for each division.
2. Based on the ROI calculated in part (a), which division is more profitable and why?
3. Calculate the residual income (RI) for each division,
4. Based on the RI calculated in part (3c), which division has a better RI and why?