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 $40, 250, eee 53, es9, eee 21,780,000 2,175,000 Average Invested Assets $16,1ee, eee 12,100,000 Exercise 22-10 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 10% 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 14% 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 i Sporting Goods Which department is most efficient and using assets to generate returns for the company Red Required 2 >

Answer 1

Return on Investment = Income/Average Invested Assets
	Numerator	Denominator	ROI
Electronics	3,059,000	16,100,000	19.0%
Sporting Goods	2,178,000	12,100,000	18.0%
More efficient		Electronics
Residual Income= Income - Average Invested Assets*Required Rate of Return
	Electronics	Sporting Goods
Net Income	3,059,000	2,178,000
Target Net Income	1,610,000	1,210,000
Residual Income	1,449,000	968,000
More efficient		Electronics
Yes, since ROI is more than the required return
Profit Margin = Income/Sales
	Numerator	Denominator	Profit Margin
Electronics	3,059,000	40,250,000	7.60%
Sporting Goods	2,178,000	21,780,000	10.00%
Higher		Sporting Goods
Investment Turnover = Sales/Average Invested Assets
	Numerator	Denominator	Investment Turnover
Electronics	40,250,000	16,100,000	2.500
Sporting Goods	21,780,000	12,100,000	1.800
More efficient		Electronics