Megatronics Corporation, a massive retailer of electronic products, is organized
ID: 2570518 • 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:
Management has determined that in order to upgrade the competitor to Megatronics’ standards, an additional $120,000 of invested capital would be needed.
1. 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).)
2. Compute the ROI of the competitor as it is now and after the intended upgrade.
3. Calculate the Northeast Division's ROI after acquisition of competitor but before upgrading. (Round your answer to 2 decimal place. (i.e., .1234 should be entered as 12.34).)
4. 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 $ 4,240,000 $ 2,640,000 Variable costs 75 % of sales 70 % of sales Fixed costs $ 856,000 $ 708,000 Invested capital $ 850,000 $ 300,000Explanation / Answer
Dear Student Thank you for using Chegg Please find below the answer and please give thumbs up Statementshowing Computations Paticulars Northeast Div Competitor Northeast if competitor is acquired Sales 4,240,000.00 2,640,000.00 6,880,000.00 Variable costs 3,180,000.00 1,848,000.00 5,028,000.00 Contribution = Sales - VC 1,060,000.00 792,000.00 1,852,000.00 Fixed costs 856,000.00 708,000.00 1,564,000.00 Income = Contribution - FC 204,000.00 84,000.00 288,000.00 Invested Capital 850,000.00 300,000.00 1,270,000.00 ROI = Income/nvested Capital 24.00% 28.00% 22.68% 2) Competitor After upgrade Sales 2,640,000.00 2,640,000.00 Variable costs 1,848,000.00 1,848,000.00 Contribution = Sales - VC 792,000.00 792,000.00 Fixed costs 708,000.00 708,000.00 Income = Contribution - FC 84,000.00 84,000.00 Invested Capital 300,000.00 420,000.00 ROI = Income/nvested Capital 28.00% 20.00% 3) Sales 6,880,000.00 Variable costs 5,028,000.00 Contribution = Sales - VC 1,852,000.00 Fixed costs 1,564,000.00 Income = Contribution - FC 288,000.00 Invested Capital 1,150,000.00 ROI = Income/nvested Capital 25.04% 4) Northeast Div Competitor Northeast if competitor is acquired Income = Contribution - FC 204,000.00 84,000.00 288,000.00 Invested Capital 850,000.00 300,000.00 1,270,000.00 ROI = Income/nvested Capital 24.00% 28.00% 22.68% Required income = Invested Capital *10% 85,000.00 30,000.00 127,000.00 Residual Income = Income - required income 119,000.00 54,000.00 161,000.00