Question

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 $45,000,000 $3,420,000 25,200,000 2,520,000 Average Invested Assets $18,000,000 14,000,000 Exercise 24-10 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 Which department is most efficient at using assets to generate returns for the company?

Answer 1

Requirement 1:-

The Return on Investments is calculated by the following formula:-

Net Income/Average Investments

Return On Investments
Particulars	Choose Numerator	Choose Denominator	=	Return on Investment
Electronics	3,420,000	18,000,000		19.00%
Sporting Goods	2,520,000	14,000,000		18.00%

Which department is most efficient at using assets to generate returns for the company? Electronics Departments is most efficient as it has a higher return on investment.

Requirement 2:-

Residual Income

Investment Center	Electronics	Sporting goods
Net Income	3,420,000	2,520,000
Target Net Income	1,980,000	1,540,000
Residual Income	1,440,000	980,000

Target Net Income is calculated as follows:-

11% * Operating assets

Company A = 11% * 18,000,000 = $1,980,000

Company B = 11% * 14,000,000 = $1,540,000

Which department is most efficient at using assets to generate returns for the company? Electronics Department is most efficient as it has a higher Residual income.

Requirement 3:-

Assuming Electronics department is presented with an investment opportunity that will yield 15% on investment, should it be accepted? No. It should not be accepted because, the company is already earning 19% as Return on Investments.

Requirement 4:-

Profit Margin

Profit Margin
Particulars	Choose Numerator	Choose Denominator	=	Profit Margin
Electronics	3,420,000	45,000,000		7.60%
Sporting Goods	2,520,000	25,200,000		10.00%

Which department generates the most net income per dollar of sales? Sporting Goods generates most net income per dollar of sales as it has a higher margin.

Please note that we are required to answer 4 questions as per the Answering guidelines which have been answered above. Kindly request you to post the remaining question(question 5) separately so that we can answer the question as well. All the best and please let me know if you have any questions via comments.