Question

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 Electronics Sporting goods Sales Income $ 42,960,000 $3,222,000 18,904,000 2,363,000 Average Invested Assets $17,900,000 13,900,000

Answer 1

According to this problem, we have to solve three requirements of the question.

Requirement 1: Compute return on investment for each department. Using return on investment, which department is most efficient at using assets to generate return for company?

Solution:- First of all, we have to Calculate return on investment.

For Calculating return on investment, we have to apply the formula i.e. Net Income / Average Invested Assets

Return on Investment

	Choose Numerator	/	Choose Denominator	=	Return on Investment
	Net Income	/	Average Invested Assets	=	Return on Investment
Electronics	$3,222,000	/	$17,900,000	=	18%
Sporting Goods	$2,363,000	/	$13,900,000	=	17%

Which department is most efficient at using assets to generate return for company?

Electronics

Note :- Because Electronics return on investment is high as comparing to Sporting Goods.

Requirement 2: Assume a target income level of 12% average invested assets. Compute residual income for each department. Which department generated the most residual income for the company?

Solution:- In this part, Income is given, we have to calculate Target Net Income.

Investment Center	Electronics	Sporting Goods
Net Income (Given)	$ 3,222,000	$ 2,363,000
Target Net Income (Working Note)	$(2,148,000)	$ (1,668,000)
Residual Net Income	$1,074,000	$ 695,000

Which department generated the most residual income for the company

Electronics

Note :- Because Electronics Residual Net Income is high as comparing to Sporting Goods.

Working Note:-

Calculation of Target Net income:

Electronics = Average Invested Assets * 12%

= $17,900,000 * 12 % = $2,148,000

Sporting Goods = Average Invested Assets * 12%

= $13,900,000 * 12% = $1,668,000

Requirement 3: Assume the electronic department is presented with a New investment opportunity that will yield a 14% return on investment. Should the new investment opportunity is accepted?

Solution:- The New investment opportunity should be accepted as it will generate higher returns and higher profits in the future.

Should the new investment opportunity is accepted?

Yes

Thank you..

Have a nice day ahead.

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