Required Information The following information applies to th

Required Information The following information applies to the questions displayed below Megamart, a retaller of consumer goods, provides the following Information on two of its departments (each considered an investment center) Sales Electronice 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 evel of 12% o average n ested 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?

Solution

Requirement 1 Computation of return on investment Return on Investment = Net income /Average investment Investmetn center Net income /Average Investment = Return on investment   Electronics $2,771,000 /$16,300,000 =0.17 or 17% Sporting goods $1,968,000 /$12,300,000 =0.16 or 16% electronics department is generating most efficient return on the investment requirement 2 Computation of residual income Investmetn center Electronics Sporting goods Net income $2,771,000 $1,968,000 target income (12%) $1,956,000 $1,476,000 $16,300,000*12% $12,300,000*12% Residual Income $815,000 $492,000 requirement 3 Should the new investment Opportunity be acceptable Yes, because the new investment Opportunity is yeilding More then the targeted Income. (14%>12%)