Question 2 Syarikat Menang, a massive retailer of electronic products, is organized in four separate divisions. The four division 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 company's Melaka Division was approached about the possibility of buying a competitor that has decided to redirect its retail activities. (if the competitor is acquired, it will be acquired its book value). The data that follow relate to recent performance of the Melaka Division and the competitors: Sale Variable costs Fixed costs Invested capital RM8,400,000 Melaka Division Competitors RM5,200,000 70% of sales 65% of sales RM2,131,500 RM1,670,000 RM1,850,000 RM625,000 Management has determined that in order to upgrade the competitors to Menang's standards, an additional RM375,000 of invested capital would be needed. a. Compute the current ROI of the Melaka Division and the division's ROI if the competitor is acquired. - 6m b. Explain the likely reaction of divisional management toward the acquisition. - 3m c. Explain the likely reaction of Menang's corporate management toward the acquisition. - 7m d. Would the division be better off if it acquired the competitor but didn't upgrade it to Menang's standards? Show the computations to support your answer. - 6m e. Assume that Menang uses residual income to evaluate performance and desires a 12% minimum return on invested capital. Compute the current residual income of the Melaka Division and the division's residual income if the competitor is acquired. Will divisional management be likely to change its attitude towards the acquisition? Why? - 6m