Question

Megamart, a retailer of consumer goods, provides the following information on two of its departments (each considered an investment center).

Investment Center	Sales			Income			Average Invested Assets
Electronics	$	63,460,000		$	3,173,000		$	16,700,000
Sporting goods		19,050,000			2,286,000			12,700,000

Exercise 9-10 Computing return on investment and residual income; investing decision LO A1

1. Compute return on investment for each department. Using return on investment, which department is most efficient at using assets to generate returns for the company?
2. Assume a target income level of 12% of average invested assets. Compute residual income for each department. Which department generated the most residual income for the company?
3. Assume the Electronics department is presented with a new investment opportunity that will yield a 14% return on investment. Should the new investment opportunity be accepted?

Complete this question by entering your answers in the tabs below.

Required 1

Compute return on investment for each department. Using return on investment, which department is most efficient at using assets to generate returns for the company?

	Return on Investment Choose Numerator: / Choose Denominator: = Return on Investment ? / ? = Return on Investment Electronics ? / ? = Sporting Goods ? / ? = Which department is most efficient at using assets to generate returns for the company? ?

Complete this question by entering your answers in the tabs below.

Required 2

	Investment Center Electronics Sporting Goods Net income ? ? Target net income ? ? Residual income ? ? Which department is most efficient at using assets to generate returns for the company? ?

Complete this question by entering your answers in the tabs below.

Required 3

	Should the new investment opportunity be accepted? ?

Required 2

Required 3

Note: Please solve the problem completely. Thank you

Answer 1

1.

Electronics department

Return on investment = Income/Average invested assets

= 3,173,000/16,700,000

= 19%

Sporting goods department

Return on investment = Income/Average invested assets

= 2,286,000/12,700,000

= 18%

Since return on investment of Electronics department is more than return on investment of sporting goods department, hence Electronics department is most efficient at using assets to generate returns for the company

2.

Electronics department

Net income = $3,173,000

Target income = 12% of average invested assets

= 16,700,000 x 12%

= $2,004,000

Residual income = Net income - Target income

= 3,173,000 - 2,004,000

= $1,169,000

Sporting goods department

Net income = $2,286,000

Target income = 12% of average invested assets

= 12,700,000 x 12%

= $1,524,000

Residual income = Net income - Target income

= 2,286,000 - 1,524,000

= $762,000

Since residual income of Electronics department is more than residual income of Sporting goods department, hence Electronics department generated the most residual income for the company

3.

Target Return of investment in Electronics department is 12% and the Electronics department is presented with a new investment opportunity that will yield a 14% return on investment.

Since return on the new investment opportunity is more than target return on investment of the Electronics department, hence the new investment opportunity should be accepted as it will generate a residual income of 2%.

Kindly give a positive rating if you are satisfied with the answer. Feel free to ask if you have any doubts. Thanks.