Reference no: EM132203240

Car Deals Inc. has two divisions: New Cars and Used Cars. The following segmented financial information is for the most recent fiscal year:

New Cars Division Used Car Division

Sales $9,000,000 $18,000,000

Cost of Goods Sold   3,300,000    8,700,000

Allocated Overhead   1,050,000     2,550,000

Selling and admin expenses     585,000       630,000

The new cars division had average operating assets totaling $17,400,000 for the year, and the used cars division had average operating assets of $22,800,000. Assume the cost of capital rate is 15% and the company's tax rate is 40%.

Required:

1. Calculate return on investment (RO I) for each division.

2. Calculate residual income for each division.