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 company's Northeast 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 Northeast Division and the competitor: |
Northeast Division | Competitor | |||||
Sales | $ | 8,400,000 | $ | 5,200,000 | ||
Variable costs | 70 | % of sales | 65 | % of sales | ||
Fixed costs | $ | 2,150,000 | $ | 1,670,000 | ||
Invested capital | $ | 1,850,000 | $ | 625,000 | ||
Management has determined that in order to upgrade the competitor to Megatronics' standards, an additional $375,000 of invested capital would be needed. |
Required: |
1. | Compute the current ROI of the Northeast Division and the division's ROI if the competitor is acquired. (Round your answers to 2 decimal places. Omit the "%" sign in your response.) |
Current ROI | 20  % | |||
ROI if competitor is acquired | 18.25 % | |||
3. | Calculate the ROI of the competitor as a standalone division. (Omit the "%" sign in your response.) | |||
ROI before upgrading | 24 % | |||
ROI after upgrading | 15 % | |||
4. | Calculate the Western Division's ROI after acquisition of competitor but before upgrading.(Round your answer to 2 decimal places. Omit the "%" sign in your response.) | |||
ROI | 21.01 % | |||
5. | Assume that Megatronics uses residual income to evaluate performance and desires a 12 percent minimum return on invested capital. Compute the current residual income of the Northeast Division and the division's residual income if the competitor is acquired. (Omit the "$" sign in your response.) | |||
Current residual income | $ 148,000 |
Residual income if competitor is acquired | $ 178,000 |