BrightTech Fiji is a retailer of computers and electronic and has four divisions. At the end of each year the four divisional managers are evaluated and bonuses are awarded based on ROI. Last year, the company as a whole produced an ROI of 16%. The management of the company's Western Division is considering to buy the operations of a competitor, Techbuy, which intended to cease its retail operations. The following data relate to recent performance of the Western division and Techbuy:

Western Division Techbuy

Sales 7500 000 5600 000

Variable costs 65% of sales 70% of sales

Fixed costs 2050 000 1580 000

Invested capital 1750 000 595 000

If the acquisition occurs, operations of Techbuy will be absorbed into Western Division. The operations of Techbuy will need to be upgraded to meet high standards, which would require an additional invested capital of $485000.

Required

1. Calculate the return on investment (ROI) of the Western division and the division if Techbuy is acquired. Explain the reaction of divisional management towards the acquisition?

2. Assume that BrighTech Fiji uses residual income (RI) to evaluate performance and desires a minimum required rate of return of 10% on invested capital. a. Calculate current residual income of the Western division and the division's residual income if Techbuy is acquired. b. Explain the reaction of divisional management towards the acquisition?