Megatronics Corporation, a massive retailer of electronic products, is organized
ID: 2456065 • Letter: M
Question
Megatronics Corporation, a massive retailer of electronic products, is organized in four separate divisions. The four divisional managers are evaluated at year-end, and bonuses are awarded based on ROI. Last year, the company as a whole produced a 13 percent return on its investment.
During the past week, management of the company’s Western Division was approached about the possibility of buying a competitor that had decided to redirect its retail activities. (If the competitor is acquired, it will be acquired at its book value.) The data that follow relate to recent performance of the Western Division and the competitor:
Management has determined that in order to upgrade the competitor to Megatronics’ standards, an additional $187,500 of invested capital would be needed.
Assume that Megatronics uses residual income to evaluate performance and desires a 12 percent minimum return on invested capital. Compute the current residual income of the Western Division and the division’s residual income if the competitor is acquired.
Megatronics Corporation, a massive retailer of electronic products, is organized in four separate divisions. The four divisional managers are evaluated at year-end, and bonuses are awarded based on ROI. Last year, the company as a whole produced a 13 percent return on its investment.
Explanation / Answer
Answer:
Residual Income computation:
Exising Western division In $ Sales 4220000 Less: Variable Expenses (sales*70%) 2954000 Contribution margin 1266000 Less: Fixed Expenses 1079000 A Net operating Income 187000 Competitor In $ Sales 2620000 Less: Variable Expenses (sales*60%) 1572000 Contribution margin 1048000 Less: Fixed Expenses 970000 B Net operating Income 78000 Overall In$ A Net operating Income - Existing 187000 B Net operating Income - competitor 78000 A Total Operating Income 265000