Solution: Exercise 10.16 1. Residual Income: North American: $1,250,000 (0.07 x $15,000,000) = $200,000 Pacific Rim: $610,000 (0.

0.07 x $6,700,000) = $141,000 Residual income is an absolute dollar measure, so it does not adjust for the relative sizes of the divisions. 2. Residual Rate of Return: North American: $200,000 / $15,000,000 = 1.33% Pacific Rim: $141,000 / $6,700,000 = 2.10% It is now possible to say the Pacific Rim Division is relatively more profitable than the Pacific-Rim Division. 3. Return on Investment: North American: $1,250,000 / $15,000,000 = 8.33% Pacific Rim: $610,000 / $6,700,000 = 9.10% ROI can be used to compare relative divisional profitability. 4. North American: 1.33% + 7% = 8.33% Pacific Rim: 2.10% + 7% = 9.10% The residual rate of return and the required rate of return will always sum to the ROI.