Question

In: Accounting

Megamart, a retailer of consumer goods, provides the following information on two of its departments (each...

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 $ 34,200,000 $ 2,907,000 $ 17,100,000
Sporting goods 16,768,000 2,096,000 13,100,000

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?

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?

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?
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?

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?
Should the new investment opportunity be accepted?

Solutions

Expert Solution

Hey,

Part 1 :

Return on investment is calculated by this formula :

= Net Profit/Investment * 100

Return on Investment
Choose Numerator: / Choose Denominator: = Return on Investment
Income / Investment = Return on Investment
Electronics 2907000 / 17100000 = 17
Sporting Goods 2096000 / 13100000 = 16
Which department is most efficient at using assets to generate returns for the company? Electronics

Part 2 :

Target Net income = Average Investment * 12%

Investment Center Electronics Sporting Goods
Net income 2907000 2096000
Target net income 2052000 1572000
Residual income 855000 524000
Which department is most efficient at using assets to generate returns for the company? Electronics

Part 3 :

Current Return on investment we are having on the electronics department is 17% and we are having an opportunity to earn a 14% return by making the new investment. Prima facie we can say we can't accept the investment opportunity as 14% is less than 17%. But if we imagine that we can't earn 17% by increasing our existing facility then having a 2nd best option is better. Imagine the normal bank deposit rate is 10 % then having 14 % is better than earning 10 %. So this decision is depending on the other factors, Prima Facie we shall not accept it.

Hope this made sense, and help you understand the concept.

ekkarill92 answered 2 years ago
Next > < Previous

Related Solutions

Megamart, a retailer of consumer goods, provides the following information on two of its departments (each...
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...
Megamart, a retailer of consumer goods, provides the following information on two of its departments (each...
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 $ 42,000,000 $ 3,360,000 $ 16,800,000 Sporting goods 19,456,000 2,432,000 12,800,000 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 10% of average invested assets. Compute residual income...
Comart, a retailer of consumer goods, provides the following information on two of its departments (each...
Comart, a retailer of consumer goods, provides the following information on two of its departments (each considered an investment center). Investment Center Sales Net Income Average Invested Assets   Electronics $ 10,200,000 $ 622,500 $ 4,150,000   Sporting goods 7,900,000 630,000 4,500,000 (1.1) Compute return on investment for each department. (Do not round your intermediate calculations and round your final answers to the nearest whole percentages. Omit the "%" sign in your response.) Return on Investment   Electronics %     Sporting goods % (1.2)...
[The following information applies to the questions displayed below.] Megamart, a retailer of consumer goods, provides...
[The following information applies to the questions displayed below.] Megamart, a retailer of consumer goods, provides the following information on two of its departments (each considered an investment center). Assume a target income level of 10% of average invested assets. Compute residual income for each department. Which department generated the most residual income for the company? Investment Center Electronics Sporting Goods Net income Target net income Residual income Which department is most efficient at using assets to generate returns for...
Required information [The following information applies to the questions displayed below.] Megamart, a retailer of consumer...
Required information [The following information applies to the questions displayed below.] 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 $ 40,000,000 $ 2,880,000 $ 16,000,000 Sporting goods 20,000,000 2,040,000 12,000,000 Compute profit margin and investment turnover for each department. Which department generates the most net income per dollar of sales? Which department is most efficient at generating sales from average...
Required information [The following information applies to the questions displayed below.] Megamart, a retailer of consumer...
Required information [The following information applies to the questions displayed below.] 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 $ 40,000,000 $ 2,880,000 $ 16,000,000 Sporting goods 20,000,000 2,040,000 12,000,000 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...
E-books, an online book retailer, has two operating departments—corporate sales and consumer sales—and two support departments—human...
E-books, an online book retailer, has two operating departments—corporate sales and consumer sales—and two support departments—human resources and information systems. Each sales department conducts merchandising and marketing operations independently. E-books uses number of employees to allocate human resources costs and processing time to allocate information systems costs. The following data are available for September 2017: Support Departments Operating Departments Human Resources Information Systems Corporate Sales Consumer Sales Budgeted costs for each department $72,700 $234,400 $998,270 $489,860 Budgeted Number of Employees...
In each of the following examples, a consumer purchases just two goods: x and y. Based...
In each of the following examples, a consumer purchases just two goods: x and y. Based on the information provided, select the set of indifference curves that is the best match. Kieran considers chewing gum (x) to be a perfect substitute for mints (y). In the previous question, what is the marginal rate of substitution between chewing gum and mints? Enter an integer value               Maeve will only consume toast (x) with two eggs (y). Efia enjoys both boba tea...
Two goods are in the consumer basket, goods X and Y. The consumer income is I,...
Two goods are in the consumer basket, goods X and Y. The consumer income is I, price of good X is Px, and price of good Y is Py. Use the consumer model to derive the demand curve for good X. Explain your answer in details. b. Using your answer in part a, clearly explain and show the substitution effect and the income effect.
The following information is departmental cost allocation with two service departments and two production departments. Percentage...
The following information is departmental cost allocation with two service departments and two production departments. Percentage Service Provided to Department Cost S1 S2 P1 P2 Service 1 (S1) $ 30,000 0 % 30 % 35 % 35 % Service 2 (S2) 20,000 20 0 20 60 Production 1 (P1) 100,000 Production 2 (P2) 150,000 REQ1. What is the amount of service department cost allocated to P1 and P2 using the direct method? REQ2. What is the total cost in P1...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT