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 Electronics Sporting goods Sales Income $42, 240,000 $3,168,000 23,120,000 2,312,000 Average Invested Assets $17,600,000 13,600,000 Exercise 09-10 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? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 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 Denominator: Choose Numerator: = Return on Investment Return on Investment Electronics Sporting Goods ir Which department is most efficient at using assets to generate returns for the company?

Answer 1

Ans. 1	Return on investment = Income / Average invested assets * 100
	Electronics	$3,168,000 / $17,600,000 * 100	18.00%
	Sporting goods	$2,312,000 / $13,600,000 * 100	17.00%
	Electronics department is most efficient at using assets to generate returns for the company.
Ans. 2	Residual income = Income - Target net income
	Electronics	$3,168,000 - $1,936,000	$1,232,000
	Sporting goods	$2,312,000 - $1,496,000	$816,000
	*Caluclation of Target net income
	Average invesment assets	$17,600,000	$13,600,000
	(*) Target income level	11.00%	11.00%
	Target net income	$1,936,000	$1,496,000
	Electronics department generates the most residual income for the company.
Ans. 3	*If the decision is being taken on the basis of targeted income :
	The investment opportunity should be accepted, because it would generate the residual income
	of 3% of the average operating assets.
	ROI of investment opportunity	15%
	Less: Target income level	11%
	Residual income	4%
	*If the decision is being taken on the basis of return on investment :
	The investment opportunity should not be accepted, because currenly the department is generating
	ROI of 18% and the investment opportunity (15%) is less than the current level of ROI.