Question

Comart, a retailer of consumer goods, provides the following information on two of its departments (each considered an investment center).

Investment Center		Sales		Net Income	Average Invested Assets
Electronics	$	11,000,000	$	788,500	$	4,150,000
Sporting goods		7,300,000		700,000		5,000,000

(1.1)

Compute return on investment for each department. (Do not round your intermediate calculations and round your final answers to the nearest whole percentages. Omit the "%" sign in your response.)

	Return on Investment
Electronics	%
Sporting goods	%

(1.2)

Using return on investment, which department is most efficient at using assets to generate returns for the company?

	Sporting goods
	Electronics

(2.1)

Assume a target income level of 11.4% of average invested assets. Compute residual income for each department. (Omit the "$" sign in your response.)

	Electronics	Sporting goods
Residual income	$	$

(2.2)

Which department generated the most residual income for the company?

	Electronics
	Sporting goods

(3)	Assume the Electronics department is presented with a new investment opportunity that will yield a 14.4% return on assets. (Assume a target income level of 11.4% of average invested assets.) Should the new investment opportunity be accepted?

	Reject
	Accept

Answer 1

1.1--Return on Investment = Net Income/Average Invested
Electronics      788500/4150000	19%
Sporting goods      700000/5000000	14%

1.2

Using return on investment,Department most efficient at using assets to generate returns for the company

Electronics (19%)

2.1
Department	Average Invested assets	Target Income at 14%	Net Income	Residual income(Net Income-Target Income)
Electronics	4,150,000	581000	788,500	207,500
Sporting goods	5,000,000	700000	700,000	0

2.2

Department that generated the most residual income for the company

Electronics

3--Accept as 14.4 % >11.4%