Megatronics Corporation, a massive retaller ofelectrohic products, IS organized
ID: 2558120 • Letter: M
Question
Megatronics Corporation, a massive retaller ofelectrohic products, IS organized In four separate divisions. The four divisional managers are evaluated at year-end, and bonuses are awarded based on ROl. Last year, the company as a whole produced a 14 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: Western Division Competitor Sales Variable costs Fixed costs $4,210,000 70 $1,074,000 2,610,000 60 $ 968,000 %of sales %of sales Invested capital $ 900,000 $ 304,000 Management has determined that in order to upgrade the competitor to Megatronics standards, an additional $171,000 of invested capital would be needed Problem 13-40 Part 3 3-a. Compute the ROl of the competitor as it is now and after the intended upgrade (Round your ROI to 2 decimal places (i.e., .1234 should be entered as 12.34).) ROI before upgrading ROI after upgrading | 22.00 % 25.00 3-b. If ROl is used as the basis for evaluation, would Megatronics Corporation likely be in favor of the acquisition of the competitor? No Yes, but only without upgrading Yes, even with upgradingExplanation / Answer
ROI before Upgradation: Net sales 2,610,000 Lless: variable cost @ 60% of sales 1566000 Contribution margin 1,044,000 Lless: Fixed cost 968,000 Net income 76,000 Invested Capital 304,000 ROI (Net Income/ Invested capital) 25% ROI after Upgardation: Net sales 2,610,000 Lless: variable cost @ 60% of sales 1566000 Contribution margin 1,044,000 Lless: Fixed cost 968,000 Net income 76,000 Invested Capital (304000+171000) 475,000 ROI (Net Income/ Invested capital) 16% Req 3-a: ROI before upgarding 25% ROI after upgrading 16% Req 3-b: Yes, even with upgrading. As the ROI is more than minimum return of the company.