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 |
$20,000,000 |
$1,500,000 |
$ 7,500,000 |
|
Sporting goods |
16,000,000 |
1,600,000 |
10,000,000 |
(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 12% 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 15% return on assets. Should the new investment opportunity be accepted? Explain.
2. Compute profit margin and investment turnover for each department. Which department generates the most net income per dollar of sales? Which department is most efficient at generating sales from average invested assets?