Answer:
1. Thus, the return on investment for electronics and sporting goods is 18% and 17% respectively. Based on return on investment, the electronics department is most efficient at using assets to generate returns for the company.
2. Thus, the residual income for electronics and sporting goods is $960,000 and $600,000 respectively. Through computation we get to know that, the electronics department has generated the most residual income for the company.
3. Yes, the new investment opportunity should be accepted s it will generate higher returns and higher profits in the future.
Explanation:
1. The formula to compute return on investment is shown below:
Return on investment = Net income ÷ average invested assets
So,
For Electronics,
The Return on investment = $2,880,000 ÷ $16,000,000 = 18%
For Sporting goods,
The return on investment = $2,040,000 ÷ 12,000,000 = 17%
Thus, the return on investment for electronics and sporting goods is 18% and 17% respectively. Based on return on investment, the electronics department is most efficient at using assets to generate returns for the company.
2. The computation of residual income is shown below
= Net income = target income level
where, target income level is 12% of average invested assets
So,
For Electronics, the residual income
= $2,880,000 - 12% × $16,000,000
= $960,000
For sporting goods, the residual income
= $2,040,000- 12% × $12,000,000
= $600,000
Thus, the residual income for electronics and sporting goods is $960,000 and $600,000 respectively. Through computation we get to know that, the electronics department has generated the most residual income for the company.
3. Yes, the new investment opportunity should be accepted as it will generate higher returns and higher profits in the future.
