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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 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?

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Expert Solution

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
1a Compute return on investment for each department.
Investment Center Choose Numerator / Choose Denominator = Return on Investment
Net Incme / Average Invested Asset = Return on Investment
Electronics $ 3,360,000 / $ 16,800,000 = 20%
Sporting goods $ 2,432,000 / $ 12,800,000 = 19%
1b Electronice Deptt is more effeicient at usingassets to generte returns for the company
2a Investment Center Electronics Sporting goods
Net Income $          3,360,000 $    2,432,000
Target Net Income $       (1,680,000) $ (1,280,000)
[10% of average invested asset]
Residual Income $          1,680,000 $    1,152,000
2b Electronice Deptt enerated the most residual income for the company
3 Assume that the Electronics department is presented with a new investment opportunity that willyield a 14% return on assets. Should the new investment opportunity be accepted?
Yes, the new investment opportunity should be accepted

ekkarill92 answered 2 years ago
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