Megamart, a retailer of consumer goods, provides the following information on tw
ID: 2751992 • Letter: M
Question
Megamart, a retailer of consumer goods, provides the following information on two of its departments (each considered an investment center). FIRST QUESTION: Compute return on investment for each department and SECOND QUESTION: Assume a target income level of 11.1% of average invested assets. Compute residual income for each department.
Investment Center Sales NetIncome Average
Invested Assets Electronics $ 11,500,000 $ 766,500 $ 3,650,000 Sporting goods 7,600,000 900,000 4,500,000
Explanation / Answer
Calculation of return on investment for each department :
Investment Center
Net Income
Average Invested Assets
Return on investment
A
B
A/B
Electronics
$ 766,500
$ 3,650,000
21.00%
Sporting goods
$ 900,000
$ 4,500,000
20.00%
Calculation of residual income for each department:
Investment Center
Net Income
Average Invested Assets
Target income level
Target income
Residual Income
A
B
C
D = B*C
A-D
Electronics
$ 766,500
$ 3,650,000
11.10%
$ 405,150
$ 361,350
Sporting goods
$ 900,000
$ 4,500,000
11.10%
$ 499,500
$ 400,500
Calculation of return on investment for each department :
Investment Center
Net Income
Average Invested Assets
Return on investment
A
B
A/B
Electronics
$ 766,500
$ 3,650,000
21.00%
Sporting goods
$ 900,000
$ 4,500,000
20.00%
Calculation of residual income for each department:
Investment Center
Net Income
Average Invested Assets
Target income level
Target income
Residual Income
A
B
C
D = B*C
A-D
Electronics
$ 766,500
$ 3,650,000
11.10%
$ 405,150
$ 361,350
Sporting goods
$ 900,000
$ 4,500,000
11.10%
$ 499,500
$ 400,500