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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 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 15% return on investment. Should the new investment opportunity be accepted?

Solutions

Expert Solution

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
Electronics 2880000*100/16000000 = 18%
Sporting goods 2040000*100/12000000 = 17%

Electronics 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

Residual income
Electronics 2880000-(16000000*12%) = 960000
Sporting goods 2040000-(12000000*12%) = 600000

Electronics 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 15% return on investment. Should the new investment opportunity be accepted

No, New investment opportunity should not be accepted.

ekkarill92 answered 1 year ago
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