Exercise 22-9 Computing return on investment and residual income; investing deci

Question

Exercise 22-9 Computing return on investment and residual income; investing decision LO A Megamart, a retailer of consumer goods, provides the following information on two of its departments (each considered an investment center). Net Average Income Invested Assets Investment Center Electronics Sporting goods Sales 11,500,000 $637,500 $ 3,750,000 8,000,000 636,000 5,300,000 1-a. Compute return on investment for each department Return on Investment Choose Numerator Choose Denominator: Return on investment Return on investment Sporting Goods

Explanation / Answer

Question - 1 (a)

Question - 1 (b)

Electronics  is the most efficient in utilizing the assets to generate income.

Question - 2(a)

Note Target net income is calculated by mulitplying the given average invested assets with target 11.10% in each case. Residual Income = Net income - target Income.

Question - 2 (b)

Electronics is having most residual income

Question - 3

Yes, since we have 15.3% return more than the target 11.10 %. This will add to the residual income.

Numerator Denominator    =    ROI Electronics 637500 / 3750000 = 0.17 Sporting goods 636000 / 5300000    = 0.12

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