Required Information The following information applies to th

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) Sales Electronica Sporting goods $32,600,000 $2,771,000 15,744,000 1.968,000 16,300,000 12,300 000 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 12% of average invested assets. Comp ute 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?

Solution

Requirement 1 : Return on Investment

Return on Investment = Net income/Average invested assets

For Electronics= $2,771,000/$16,300,000=17%

For Sporting Goods = $1,968,000/$12,300,000=16%

Hence, Electronics department is most efficient at using assets to generate returns for the company.

Requirement 2 : Residual income for each department

Investment Center Electronics Sporting Goods

Net Income $2,771,000 $1,968,000

Targeted Net Income $ 1,956,000 $ 1,476,000

Residual Income $ 315,000 $ 492,000

Most Residual income: Sporting goods

Requirement 3 :

Answer : Yes, the new investment opportunity should be accepted.