Required information [The following information applies to the questions display
ID: 2431664 • Letter: R
Question
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).
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. 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?
Invested Assets Electronics $ 40,000,000 $ 2,880,000 $ 16,000,000 Sporting goods 20,000,000 2,040,000 12,000,000
Explanation / Answer
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?
Electronics 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. Compute residual income for each department. Which department generated the most residual income for the company
Electronics 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
No, New investment opportunity should not be accepted.
Return on investment Electronics 2880000*100/16000000 = 18% Sporting goods 2040000*100/12000000 = 17%Related Questions
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