Question

Required information Use the following information for the Exercises below. [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 $ 39,840,000 $ 2,988,000 $ 16,600,000 Sporting goods 25,200,000 2,142,000 12,600,000 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 11% 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?

Answer 1

Answer-1
Investment Center	Net Income	Average Invested Asset	Return on Investment ( Net Income/Average invested Asset)
Electornics	$2,988,000	$16,600,000	18%
Sporting Goods	$2,142,000	$12,600,000	17%
Electronic Department is most efficient at using assets to generate return for company.

Answer-2
Investment Center	Electronics	Sporting Goods
Net Income	$2,988,000	$2,142,000
Target Net Income (loss) (11%X Average Invested Asset)	$1,826,000	$1,386,000
Residual Income	$1,162,000	$756,000
Electronic Department is generated more resiual income and is most efficient at using asset to generate return for company

Answer-3

Yes the investment opportunity to be accepted because:-

-As mentioned new investment opportunity give 15 % rate of return. However, Existing investment giving more return as compare with new opprtunity.

- As per basis on Residual income ,new Investment can be accepted because which increase further residual Income

- As per above to analysis, investment opportunity can be accepted to get more residual income.