Hello, I need help with part 2a. of this problem... please help thanks. How do I

Question

Hello, I need help with part 2a. of this problem... please help thanks. How do I compute the residual income for each department?

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

   

   

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?

   

Assume a target income level of 11.3% of average invested assets. Compute residual income for each department.

        

    

Assume the Electronics department is presented with a new investment opportunity that will yield a 14.4% return on investment. Should the new investment opportunity be accepted?

Investment Center Sales Net
Income Average
Invested Assets   Electronics $ 10,000,000 $ 722,500 $ 4,250,000   Sporting goods 8,900,000 784,000 5,600,000

Explanation / Answer

(2a) Net income of Electronics = $722,500

Target Net Income = $4,250,000 * 11.3% = $480,250

Residual Income = 722,500 - 480,250 = $242,250

Net Income of Sporting Goods = $784,000

Target net income = 5,600,000*11.3% = $632,800

Residual Income = 784,000 - 632,800 = $151,200

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