Question

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 $40,500,000 $2,916,000 20,740,000 2,074,000 Average Invested Assets $16,200,000 12,200,000 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 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 Which department is most efficient at using assets to generate returns for the company?

Answer 1

Answer:

1a)
					Numerator	denominator	ROI
Electronics	29,16,000	1,62,00,000	18%
Sporting goods	20,74,000	1,22,00,000	17%
1b)
The return on investment is higher in case of electronics, thus electronics department is more efficient at using its assets in generating returns.
2a)
				Investment Center	Electronics	sporting goods
Net Income	29,16,000	20,74,000
Less:Target net income(11%of Averge invested assets)	17,82,000	13,42,000
Residual income	11,34,000	7,32,000
Question - 2 (b)
Electronics is having most residual income
Question - 3
Yes, since we have 15% return more than the target 11%. This will add to the residual income.