Megatronics Corporation, a massive retailer of electronic products, is organized in four separate divisions. The four divisional managers are evaluated at year-end, and bonuses are awarded based on ROI Last year, the company as a whole produced a 10 percent return on its Investment. During the past week, management of the company's Northeast 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 data that follow relate to recent performance of the Northeast Division and the competitor Northeast Division $4,350,000 700 of sales $1.098.000 $1,150,000 Competitor $2,750,000 Variable coats 74.500 of sales Invested capital $ 400,000 Management has determined that in order to upgrade the competitor to Megatronics' standards, an additional $150,000 of invested capital would be needed. Required: 1. Compute the current ROI of the Northeast Division and the division's ROI the competitor is acquired 2. If divisional management is being evaluated on the basis of ROI will the Northeast Division likely pursue acquisition of the competitor? 3-a. Compute the ROI of the competitor as it is now and after the intended upgrade. 3-b. If ROI is used as the basis for evaluation would Megatronics Corporation likely be in favor of the acquisition of the competitor? 4. Calculate the Northeast Division's Rol after acquisition of competitor but before upgrading. 5-a. Assume that Megatronics uses residual income to evaluate performance and desires a 14 percent minimum return on invested capital Compute the current residual income of the Northeast Division and the division's residual income if the competitor is acquired. 5-b. If divisional management is being evaluated on the basis of residual income, will the Northeast Division likely pursue acquisition of the competitor? Kitchen Magician, Inc. has assembled the following data pertaining to its two most popular products. Blender Electric Mixer 13 Direct material Direct labor Manufacturing overhead $40 per machine hour Cost if purchased from an outside supplier Annual demand (units) 80 21,000 106 30,000 Past experience has shown that the fixed manufacturing overhead component included in the cost per machine hour averages $31. Kitchen Magician's management has a policy of filling all sales orders, even if it means purchasing units from outside suppliers. Required: 1. If 52,000 machine hours are available, and management desires to follow an optimal strategy, how many units of each product should the firm manufacture? How many units of each product should be purchased? 2. With all other things constant, if management is able to reduce the direct material for an electric mixer to $19 per unit, how many units of each product should be manufactured? Purchased
