Megatronics Corporation, a massive retailer of electronic products, is organized
ID: 2516341 • 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 14 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:
Management has determined that in order to upgrade the competitor to Megatronics’ standards, an additional $150,000 of invested capital would be needed.
Required:
1. Compute the current ROI of the Northeast Division and the division’s ROI 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 ROI of the competitor as it is now and after the intended upgrade.
3-b. If ROI 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 ROI after acquisition of competitor but before upgrading.
5-a. Assume that Megatronics uses residual income to evaluate performance and desires a 10 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?
Compute the current ROI of the Northeast Division and the division’s ROI if the competitor is acquired. (Round your answers to 2 decimal places (i.e., .1234 should be entered as 12.34).)
Compute the ROI of the competitor as it is now and after the intended upgrade.
Assume that Megatronics uses residual income to evaluate performance and desires a 10 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.
Northeast Division Competitor Sales $ 4,250,000 $ 2,650,000 Variable costs 70 % of sales 60 % of sales Fixed costs $ 1,095,000 $ 972,000 Invested capital $ 1,000,000 $ 400,000Explanation / Answer
Formula used for calculation ROI = Operating Income/Invested capital% Residual Income = Operating Income-10% of invested capital Requirement 1 Current ROI Northeast Division Sales 4250000 Variable cost 2975000 Fixed cost 1095000 Operating Income 180000 Invested capital 1000000 Current ROI 18 Divison's ROI if competitor is acquired Northeast Division Competitor Total Sales 4250000 2650000 6900000 Variable cost 2975000 1590000 4565000 Fixed cost 1095000 972000 2067000 Operating Income 180000 88000 268000 Invested capital 1000000 550000 1550000 Division ROI if competitor is acquired 17.29032 Requirement 2 Yes If divisional management is being evaluated on the basis of ROI, Northeast Division is likely to persue the acqisition of competitor Requirement 3a) Competitor's ROI as it is now Sales 2650000 Variable cost 1590000 Fixed cost 972000 Operating Income 88000 Invested capital 400000 Competitor's ROI as it is now 22 Competitor's ROI after upgradation Sales 2650000 Variable cost 1590000 Fixed cost 972000 Operating Income 88000 Invested capital 550000 16 Requirement 3b) Yes, Megtronics Corporation is most likely to be in favour of acquisition as Competitor's ROI after and before upgradation is more than company's overall ROI Requirement 4 Northeast's Division's ROI after acquistion of competitor but before upgrading Northeast Division Competitor Total Sales 4250000 2650000 6900000 Variable cost 2975000 1590000 4565000 Fixed cost 1095000 972000 2067000 Operating Income 180000 88000 268000 Invested capital 1000000 400000 1400000 Northeast's Division's ROI after acquistion of competitor but before upgrading 19.14286 Requirement 5a) Computation of current residual Income of northeast division Northeast Division Sales 4250000 Variable cost 2975000 Fixed cost 1095000 Operating Income 180000 Minimum return required 100000 Invested capital 1000000 Residual Income 80000 Computation of residual Income of northeast division if competitor is acquired Northeast Division Competitor Total Sales 4250000 2650000 6900000 Variable cost 2975000 1590000 4565000 Fixed cost 1095000 972000 2067000 Operating Income 180000 88000 268000 Invested capital 1000000 550000 1550000 Minimum return required 155000 Residual Income 113000 Yes, Northeast division is most likely to acquire the competitor as its residual income after acquisition of competitor is more than before acquistion of competitor