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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
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 12 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 | Competitor | ||||||
Sales | $8,600,000 | $4,250,000 | |||||
Variable costs | 75% of sales | 60% of sales | |||||
Fixed costs | $1,800,000 | $1,600,000 | |||||
Invested capital | $3,100,000 | $225,000 | |||||
Management has determined that in order to upgrade the competitor to Megatronics' standards, an | |||||||
additional $275,000 of invested capital would be needed. | |||||||
Required: As a group, complete the following requirements. | |||||||
1 | Compute the current ROI of the Northeast Division and the division's ROI if the competitor is acquired. | ||||||
2 | What is the likely reaction of divisional management toward the acquisition? Why? | ||||||
3 | What is the likely reaction of Megatronics' corporate management toward the acquisition? Why? | ||||||
4 | Would the division be better off if it didn't upgrade the competitor to Megatronics' standards? | ||||||
Show computations to support your answer. | |||||||
5 | Assume that Megatronics uses residual income to evaluate performance and desires an 11 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. Will divisional management | |||||||
be likely to change its attitude toward the acquisition? Why? | |||||||
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