Refer to the information in problem 11-40.

Required: Explain how each of the managers’ feelings about the acceptability of the proposed acquisition would differ if the company used residual income to evaluate segment performance instead of return on investment.

problem 11-40.

The following information is available for the three divisions of the Planet Company:

The company is considering acquiring an automotive parts manufacturing company that is expected to provide income of \($36,450\). The acquisition would require an investment of \($225,000\). Although the prospective acquisition would fit nicely into the Automotive Division’s operation, the Automotive Division’s manager has voiced considerable reservations. He believes it would not be in the company’s best interest to acquire the new segment.
The manager of the Industrial Division concurs with the Automotive Division manager.
Oddly enough, the Consumer Division manager not only thinks the acquisition is a good idea, but has volunteered to accept it in her division.

Required:

a. Determine the return on investment for each division.

b. Do you feel that it is in the company’s best interest to acquire the automotive parts manufacturer? Explain your answer.

c. Why are the Automotive and Industrial Division managers reluctant to recommend the acquisition?

d. Why would the Consumer Division manager volunteer to accept the proposed acquisition into her division?

Transcribed Image Text:

Amount invested in each division: Automotive Division Industrial Division Consumer Division Segment margin of each division: Automotive Division Industrial Division Consumer Division $1,235,000 $2,005,000 $6,022,000 $202,540 $332,830 $963,520 The required rate of return for the company is 14 percent. The company uses return on investment to evaluate segment performance.