Question

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

Investment Center	Sales			Income			Average Invested Assets
Electronics	$	56,100,000		$	2,805,000		$	16,500,000
Sporting goods		25,000,000			2,000,000			12,500,000

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 level of 10% 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?

Answer 1

1)

Investment Center	Income	Avg Assets	Return on Investment
Electronics	2,805,000	16,500,000	17%
Sporting goods	2,000,000	12,500,000	16%

Electronics department is most efficient at using assets to generate returns for the company

2)

Investment Center	Electronics	Sporting goods
Net Income	$ 2,805,000.00	$ 2,000,000.00
Target Net Income	$ 1,650,000.00	$ 1,250,000.00
Residual Income	$ 1,155,000.00	$      750,000.00

Electronics department generated the most residual income for the company

3) Yes the New Investment opportunity be accepted.