Required information Use the following information for the Exercises below. [The
ID: 2521830 • Letter: R
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).
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 14% return on investment. Should the new investment opportunity be accepted?
Investment Center Sales Income Average
Invested Assets Electronics $ 34,200,000 $ 2,907,000 $ 17,100,000 Sporting goods 16,768,000 2,096,000 13,100,000
Explanation / Answer
1.Return on investment for each department.
Return on Investment
Choose Numerator:
/
Choose Denominator:
=
Return on Investment
/
=
Return on Investment
Electronics
2,907,000
/
17,100,000
=
17
Sporting Goods
2,096,000
/
13,100,000
=
16
Which department is most efficient at using assets to generate returns for the company?
Electronics Department
2Assume 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?
Investment Center
Electronics
Sporting Goods
Net income
2,907,000
2,096,000
Target net income
2052000
1572000
Residual income
855,000
524,000
Which department is most efficient at using assets to generate returns for the company?
Electronics Department
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?
Should the new investment opportunity be accepted?
Yes, the new investment opportunity should be accepted
Return on Investment
Choose Numerator:
/
Choose Denominator:
=
Return on Investment
/
=
Return on Investment
Electronics
2,907,000
/
17,100,000
=
17
Sporting Goods
2,096,000
/
13,100,000
=
16
Which department is most efficient at using assets to generate returns for the company?
Electronics Department
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