Part 1:

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	$	45,000,000		$	3,420,000		$	18,000,000
Sporting goods		25,200,000			2,520,000			14,000,000
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 11% 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 investment. Should the new investment opportunity be accepted?

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?

Return on Investment
	Choose Numerator:	/	Choose Denominator:	=	Return on Investment
		/		=	Return on Investment
Electronics		/		=
Sporting Goods		/		=
Which department is most efficient at using assets to generate returns for the company?

Assume a target income level of 11% of average invested assets. Compute residual income for each department. Which department generated the most residual income for the company?

Investment Center	Electronics	Sporting Goods
Net income
Target net income
Residual income
Which department is most efficient at using assets to generate returns for the company?

Assume the Electronics department is presented with a new investment opportunity that will yield a 15% return on investment. Should the new investment opportunity be accepted?

Should the new investment opportunity be accepted?

Part 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?

Compute profit margin for each department. Which department generates the most net income per dollar of sales?

Profit Margin
	Choose Numerator:	/	Choose Denominator:	=	Profit Margin
Investment Center		/		=	Profit Margin
Electronics		/		=
Sporting Goods		/		=
Which department generates the most net income per dollar of sales?

Compute investment turnover for each department. Which department is most efficient at generating sales from average invested assets?

Investment Turnover
	Choose Numerator:	/	Choose Denominator:	=	Investment Turnover
Investment Center		/		=	Investment Turnover
Electronics		/		=
Sporting Goods		/		=
Which department is most efficient at generating sales from average invested assets?

Part 3:

Below are departmental income statements for a guitar manufacturer. The manufacturer is considering eliminating its electric guitar department since it has a net loss. The company classifies advertising, rent, and utilities expenses as indirect.

WHOLESALE GUITARS Departmental Income Statements For Year Ended December 31, 2017

Acoustic

Electric

Sales

$

102,200

$

84,300

Cost of goods sold

45,175

47,250

Gross profit

57,025

37,050

Operating expenses

Advertising expense

5,055

4,310

Depreciation expenseequipment

10,100

8,500

Salaries expense

19,500

17,700

Supplies expense

1,990

1,750

Rent expense

7,055

6,040

Utilities expense

2,995

2,580

Total operating expenses

46,695

40,880

Net income (loss)

$

10,330

$

(3,830

)

1. Prepare a departmental contribution report that shows each departments contribution to overhead.

WHOLESALE GUITARS
Income Statement Showing Departmental Contribution to Overhead
For Year Ended December 31, 2017
	Acoustic Dept.	Electric Dept.	Combined
Direct expenses
Total direct expenses	0	0	0
Departmental contributions to overhead	$0	$0	$0
Indirect expenses
Total indirect expenses			0
			$0

2. Based on contribution to overhead, should the electric guitar department be eliminated? Yes/ No