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 (ROI).

Just recently, the management of Worlds Southern Division was approached about the possibility of acquiring a competitor. If the competitor is acquired, the investment required would be the competitors net operating assets plus any additional investment in operating assets required for the acquisition. The data that follow relate to recent performance of Worldss Southern Division and the competitor company: Southern Division management has determined that merging the competitor company with Worlds operating systems would require an additional $600,000 investment in operating assets.

Required: Show all calculations.

-Compute the current ROI of the Southern Division. -What would Southern Divisions ROI be if the competitor company were acquired? -What is the likely reaction of Southern Divisions management toward this acquisition and why ?

-What would the likely reaction of Worlds top management be toward this acquisition and why ? -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 Southern Division. -Compute Southern Divisions residual income if the competitor company were acquired.

If Residual Income is used as the performance measure for divisions by World, what is the likely reaction of Southern Divisions management toward this acquisition and why?

\begin{tabular}{|l|l|l|} \hline & Southern Division & Competitor Company \\ \hline Sales & $4,400,000 & $2,500,000 \\ \hline Variable Costs & 65% of sales & 70% of sales \\ \hline Fixed Costs & $1,400,000 & $850,000 \\ \hline Net Operating Assets & $2,800,000 & $600,000 \\ \hline \end{tabular}