CompuTech, Inc., a manufacturer of products using the latest microprocessor technology, has appointed and Performance you the manager of its Micro Technology Division. Your division has $800,000 in assets and manufac-

Measures; Ethics tures a special chip assembly. On January 2 of the current year, you invested $1 million in automated

(LO 5,7) equipment for chip assembly. At that time, your expected income statement was as follows:

SEIESIECVEMUC erat creates uaeen tent Tene $3,200,000 eXcel Operating costs:

mhhe.com/hilton4e Unitlevel"(Variable)) ccccsssccessossncessneeteoteness 400,000 Facility level (fixed, all CaSh) on... 1,500,000 Depreciation:

N@WCQUIDIMENE ce. ceteer cee sars.secesnn cmeneeeeentnt 300,000 TINS eee ctaoctsses cee staat sere oBee ater 250,000 DIVISIOMODe ral |O NOlitcvereeecereresenereeaase $ 750,000 On October 25, a sales representative from Klondike Machine Company approached you. For $1.3 million, Klondike offers a new assembly machine with significant improvements over the equipment you bought on January 2. The new equipment would expand department output by 10 percent while reducing cash fixed costs by 5 percent. The new equipment would be depreciated for accounting purposes over a three-year life. Depreciation would be net of the new machine’s $100,000 salvage value.

The new equipment meets your company’s 20 percent cost of capital criterion. If you purchase the new machine, it must be installed prior to the end of the year. For practical purposes, though, you can ignore depreciation on the new machine because it will not go into operation until the start of the next year.

The old machine, which has no salvage value, must be disposed of to make room for the new machine.

Your company has a performance evaluation and bonus plan based on ROI. The return includes any losses on disposals of equipment. Investment is computed based on the average balance of assets for the year, net book value.

Required

a. What is your division’s ROI this year if it does not acquire the new machine?

b. What is your division’s ROI this year if it does acquire the new machine?

c. Ifthe new machine is acquired and operates according to specifications, what ROI is expected for next year?

d. Is it ethical to decline to purchase the new machine? Explain.

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