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Situation: Office Supplies Ltd has a geographical structure with two divisions aligned with its two markets: Sydney and Brisb

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Answer #1
Before Investment After Investment
Sydney Brisbane Sydney Brisbane
Sales $6,00,000 $4,00,000 $7,00,000 $5,00,000
Contribution Margin $3,12,000 $2,32,000 $3,62,000 $2,82,000
Fixed Costs $2,80,000 $1,90,000 $3,22,250 $2,32,250
Common Costs($70,000 in ratio of 6:4) $42,000 $28,000 $40,833 $29,167
Net Income -$10,000 $14,000 -$1,083 $20,583
Divisional Investments $2,00,000 $2,80,000 $2,50,000 $3,30,000
ROI(Net Income / Divisional Investments) -5.00% 5.00% -0.43% 6.24%
Residual Income[Net Income-(Average Invested assets*15%)] -$40,000 -$28,000 -$38,583 -$28,917
If the investment opportunity is to be taken by any division then it would be Brisbane division as the Residual income is less as compared to Sydney Division
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