The Megamobile Communications Company (MCC) has a decentralised structure. The senior managers of

each Strategic

Business Unit (BU) are encouraged to make decisions and are required to account for their outcome using

mostly financial performance measures. Currently MCC reviews performance annually and the manager's

bonus is calculated on the increase of the ROl each year.

The following financial outcomes have been forecast for the Wholesale Products Division (WPD) in the

coming year.

Sales

$25,000,000

% Profit

Invested Capital

50%

$62,500,000.00

Tax Rate

25%

WACC

12%

Creditors & non-interest credit

$4,000,000

Additional information:

If the manager of the Wholesale Products Division was considering a proposed expansion of the business. It

would involve considerable investment however due to slightly higher expected costs the profit margin

overall would be lower. The budgeted ADDITIONAL financial changes are shown below:

New business expansion proposed

Additional sales

% Profit after expansion

Extra invested capital

$8.000.000

38%

$21,100,000

The manager discusses his bonus with the CEO and it is agreed that the manager will maintain the bonus

providing ROl does not fall below 24%. If Sell price due to competition and the investment amount is fixed

the manager will have to find cost savings to achieve this target. Required: calculate the amount of cost saving required to achieve the targeted 24% ROI fot the wholesale products division