Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

You have been provided with the below selected data from World Corporation, a company with several divisions. Division managers are evaluated at year-end, and bonuses

You have been provided with the below selected data from World Corporation, a company with several divisions. Division managers are evaluated at year-end, and bonuses are awarded based on ROI. Last year, World Corporation as a whole, produced a 12 percent return on its investment

Just recently, the management of World's Eastern Division was approached about the possibility of acquiring a competitor. If the competitor is acquired, the investment required would be the competitor's net operating assets. The data that follow relate to recent performance of World's Eastern Division and the competitor company:

Eastern Division Competitor Company

Sales $4,400,000 $2,500,000

Variable Costs 65% of Sales 70% of Sales

Fixed Costs $1,200,000 $850,000

Net Operating Assets $2,100,000 $100,000

Eastern Division management has determined that merging the competitor company with World's operating systems would require an additional $100,000 investment in operating assets, that is, an additional $100,000 in invested capital would be needed.

1.Compute the current ROI of the Eastern Division.

2.What would Eastern Division's ROI be if the competitor company were acquired?

3.What is the likely reaction of Eastern Division's management toward this acquisition and why (Be as specific as possible)?

4.What would the likely reaction of World's top management be toward this acquisition and why (Be as specific as possible)?

5.Suppose that World uses residual income to evaluate performance and desires a 12 percent minimum return on invested capital. Compute the current residual income of the Eastern Division

6.Compute Eastern Division's residual income if the competitor company were acquired.

7.If Residual Income is used as the performance measure for divisions by World, what is the likely reaction of Eastern Division's management toward this acquisition and why (Be as specific as possible)?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Management Accounting Information for creating and managing value

Authors: Kim Langfield Smith, David Smith, Paul Andon, Ronald Hilton, Helen Thorne

8th edition

9781760420413 , 978-1760420406

More Books

Students also viewed these Accounting questions

Question

1. What will happen in the future

Answered: 1 week ago

Question

3. Avoid making mistakes when reaching our goals

Answered: 1 week ago