Brick & Mortar Company (BMC)

You are an intern working for BMC, a manufacturing conglomerate corporation headquartered in Melbourne.The companys slogan is Made in Australia, for Australians, proudly manufacturing all its products in Australia and focussing on selling the products to the Australian market.

Question 1

The board of BMC has advised the manager of the Clothing Retail Division to consider acquiring a competitor located in Sydney for improving the conglomerates clothing retail market share. BMC has always used return on investment (ROI) for evaluating the performance of its divisions; the manager of any division that reports an annual increase in their ROI is given a bonus, but the managers of divisions where the ROI declines must provide a very convincing explanation as to why they should get a bonus. Where ROI has declined, the bonus is limited to only 50 per cent of the bonus that is paid to the divisions that report an increase in ROI.

Some managers are petitioning the board of BMC for changing the divisions performance evaluation from ROIto a residual income (RI), using the conglomerates required annual rate of return of 15 percent.

The following data relate to the most recent financial year:

Table 1 Financial data Clothing Retail Division

Competitor

$3,500,000 $4,000,000

$1,200,000 $2,000,000 $800,000

Total assets Sales revenue Less

Variable expense

Fixed expense Operating profit

Required

$12,000,000 $15,000,000

$8,000,000 $3,000,000 $4,000,000

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1. a) Calculate the ROI for the Clothing Retail Division and the competitor before the acquisition; calculate the ROI for the entire division after merger and acquisition (i.e., combing the Clothing Retail Division with the competitor). Explain why the manager of the Clothing Retail Division may be reluctant to acquire the competitor. Provide calculations based on the compensation plan discussed above.(Chapter 19, 10 marks)