Problem 13-40 ROI and Residual Income; Investment Evaluation (LO 13-2, 13-3, 13-4, 13-8)

[The following information applies to the questions displayed below.]

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 13 percent return on its investment.

During the past week, management of the companys Western 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 Western Division and the competitor:

	Western Division			Competitor
Sales	$	4,200,000		$	2,600,000
Variable costs		70	% of sales		65	% of sales
Fixed costs	$	1,075,000		$	835,000
Invested capital	$	925,000		$	312,500

Management has determined that in order to upgrade the competitor to Megatronics standards, an additional $187,500 of invested capital would be needed.

Required:

1.	Compute the current ROI of the Western Division and the divisions ROI if the competitor is acquired. (Round your "Percentage" answer to 2 decimal places (i.e., .1234 should be entered as 12.34).)

References

eBook & Resources

ProblemLearning Objective: 13-02 Compute an investment centers return on investment (ROI), residual income (RI), and economic value added (EVA).Learning Objective: 13-08 Understand the behavioral issues of incentives, goal congruence, and internal controls.

Problem 13-40 Part 1Learning Objective: 13-03 Explain how a manager can improve ROI by increasing either the sales margin or capital turnover.

Difficulty: MediumLearning Objective: 13-04 Describe some advantages and disadvantages of both ROI and residual income as divisional performance measures.

Check my work

2.

value: 0.45 points

Required information

Problem 13-40 Part 2

2.

If divisional management is being evaluated on the basis of ROI, will the Western Division likely pursue acquisition of the competitor?

	Yes
	No

References

eBook & Resources

ProblemLearning Objective: 13-02 Compute an investment centers return on investment (ROI), residual income (RI), and economic value added (EVA).Learning Objective: 13-08 Understand the behavioral issues of incentives, goal congruence, and internal controls.

Problem 13-40 Part 2Learning Objective: 13-03 Explain how a manager can improve ROI by increasing either the sales margin or capital turnover.

Difficulty: MediumLearning Objective: 13-04 Describe some advantages and disadvantages of both ROI and residual income as divisional performance measures.

Check my work

3.

value: 0.45 points

Required information

Problem 13-40 Part 3

3-a.	Compute the ROI of the competitor as it is now and after the intended upgrade. (Round your ROI to 2 decimal places (i.e., .1234 should be entered as 12.34).)

3-b.

If ROI is used as the basis for evaluation, would Megatronics Corporation likely be in favor of the acquisition of the competitor?

	No
	Yes, but only without upgrading
	Yes, even with upgrading

rev: 03_21_2014_QC_47182

References

eBook & Resources

ProblemLearning Objective: 13-02 Compute an investment centers return on investment (ROI), residual income (RI), and economic value added (EVA).Learning Objective: 13-08 Understand the behavioral issues of incentives, goal congruence, and internal controls.

Problem 13-40 Part 3Learning Objective: 13-03 Explain how a manager can improve ROI by increasing either the sales margin or capital turnover.

Difficulty: MediumLearning Objective: 13-04 Describe some advantages and disadvantages of both ROI and residual income as divisional performance measures.

Check my work

4.

value: 0.45 points

Required information

Problem 13-40 Part 4

4.	Calculate the Western Division's ROI after acquisition of competitor but before upgrading. (Round your "Percentage" answer to 2 decimal places. (i.e., .1234 should be entered as 12.34).)

References

eBook & Resources

ProblemLearning Objective: 13-02 Compute an investment centers return on investment (ROI), residual income (RI), and economic value added (EVA).Learning Objective: 13-08 Understand the behavioral issues of incentives, goal congruence, and internal controls.

Problem 13-40 Part 4Learning Objective: 13-03 Explain how a manager can improve ROI by increasing either the sales margin or capital turnover.

Difficulty: MediumLearning Objective: 13-04 Describe some advantages and disadvantages of both ROI and residual income as divisional performance measures.

Check my work

5.

value: 0.45 points

Required information

Problem 13-40 Part 5

5-a.	Assume that Megatronics uses residual income to evaluate performance and desires a 12 percent minimum return on invested capital. Compute the current residual income of the Western Division and the divisions residual income if the competitor is acquired.

5-b.

If divisional management is being evaluated on the basis of residual income, will the Western Division likely pursue acquisition of the competitor?

	Yes
	No

References

eBook & Resources

ProblemLearning Objective: 13-02 Compute an investment centers return on investment (ROI), residual income (RI), and economic value added (EVA).Learning Objective: 13-08 Understand the behavioral issues of incentives, goal congruence, and internal controls.

Problem 13-40 Part 5Learning Objective: 13-03 Explain how a manager can improve ROI by increasing either the sales margin or capital turnover.

Difficulty: Medium