Megatronics Corporation, a massive retailer of electronic products, is organized
ID: 2515876 • 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 15 percent return on its investment. During the past week, management of the company's Northeast 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 Northeast Division and the competitor: Northeast Division $4,320,000 Competitor Sales Variable costs Fixed costs Invested capital $2,720,000 75% of sales 70% of sales $ 883,000 $ 985,000 $ 744,000 300,000 Management has determined that in order to upgrade the competitor to Megatronics' standards, an additional $180,000 of invested capital would be needed Required: 1. Compute the current ROl of the Northeast Division and the division's ROl if the competitor is acquired 2. If divisional management is being evaluated on the basis of ROI, will the Northeast Division likely pursue acquisition of the competitor? 3-a. Compute the ROl of the competitor as it is now and after the intended upgrade 3-b. If ROl is used as the basis for evaluation, would Megatronics Corporation likely be in favor of the acquisition of the competitor? 4. Calculate the Northeast Division's ROl after acquisition of competitor but before upgradingg 5-a. 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 Northeast Division and the division's residual income if the competitor is acquired 5-b. If divisional management is being evaluated on the basis of residual income, will the Northeast Division likely pursue acquisition of the competitor?Explanation / Answer
Northern Division Competitor Sales $4,320,000 2720000 Less: variable cost $3,240,000 1904000 Contribution margin $1,080,000 $816,000 Fixed cost 883000 744000 net operating income $197,000 $72,000 Ans 1 ROI Net operating income/Invested capital *100 Norther Division 197000/985000*100 20 % Competitior 72000/300000*100 24 % ans 2 Yes it will purchase as the ROI is 24% of competitor ans 3a ROI before upgrade Competitior 72000/300000*100 24 % ROI after upgrade 15 % 72000/(300000+180000)*100 As 3b Yes but only without upgrading ans 4 ROI 20.93 % (197000+72000)/(300000+985000)*100 ans 5 Northern Division Divisional Net operating income $197,000 $269,000 (197000+72000) Less:Min req rate*invested capital 118200 154200 12%*985000 12%*(985000+300000) Residual income $78,800 $114,800 ans 5b Yes If any doubt please comment