CENCES MAILINGS REVIEW VIEW FORMAT DESIGN 1.1.1.2.1.3 1.4 1.5 1.6 1.7. 18. 1.9.1 10 1 11 | 12 | 13.1 Question 2 Mega Corporation, a massive retailer of electronic products, is organised in four separate divisions. One of the division is Dynamic division. The four divisional managers are evaluated at year end, and bonuses are awarded based on return on investment (ROI). Last year, the company as a whole produced a 13% return on its investment. During the past week, management of the company's Dynamic 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 following data relates to recent performance of the Dynamic Division and the competitor. CI Company Sales Variable costs Fixed costs Invested capital Dynamic Division RM500,000 75% of sales RM100,000 RM100,000 Competitor RM200,000 60% of sales RM70,000 RM50,000 The management has determined that in order to upgrade the competitor to Mega's standards, an additional RM30,000 invested capital would be needed Required (a) Compute the current ROI of Dynamic Division and the division's ROI, if the competitor is acquired (10 marks) (6) Describe the likely reaction of divisional management toward the acquisition 15 marks) {C) Assume that Mega uses residual income to evaluate performance and desires a 10 percent minimum retum on invested capital Compute the current residual income of the Dynamic Division and the division's residual income if the competitor is acquired Wit divisional management be likely to change its attitude toward the acquisition? (10 marks) O erine