n, a massive retailer of electronic products, is organized in four separate divi
ID: 2522560 • Letter: N
Question
n, 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 ROL Last year, the percent return on its investment. company as a whole produced a 16 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 reta relate to recent performance of the Northeast Division and the competitor ail activities. of the competitor is acquired, it will be acquired at its book value) The data that follow Northeast Division $4,380,000 Competitor Sales Variable costs Pixed costs Invested capital $2,780,000 70% of sales 65% of sales $1,084,000 $1,000,000 $ 892,000 $ 300,000 Management has determined that in order to upgrade the competitor to Megatronics' standards, an additional $150,000 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. 2. If divisional management is being evaluated on the basis of ROl, will the Northeast Division likely pursue acquisition of the competitor? 3-a. Compute the ROI of the competitor as it is now and after the intended upgrade. 3-b. If ROI is used as the basis for evaluation, would Megatronics Corporation likely be in favor of the acquisition of the competitor? 4. Calculate the Northeast Division's ROI after acquisition of competitor but before upgrading 5-a. Assume that Megatronics uses residual income to evaluate performance and desires a 14 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. 5-b. If divisional management is being evaluated on the basis of residual income, will the Northeast Division likely pursue acquisition of Complete this question by entering your answers in the tabs below. Req 1 Req 2 Req 3A Req 38 Req 4 Req SA Req 5B Calculate the Northeast Division's ROI after acquisition of competitor but before upgrading. (Round your answer to 2 decimal place. (i.e., .1234 should be entered as 12.34).) Prey 1 of 1 NextExplanation / Answer
4 Sales (4380000+2780000) 7160000 Less: Variable cost (4380000*70%)+(2780000*65%) 4873000 Fixed cost (1084000+892000) 1976000 6849000 Net income 311000 ROI=Net income/invested capital=311000/(1000000+300000+150000)=21.45% 5a Current residual income: Sales 4380000 Less: Variable cost (4380000*70%) 3066000 Fixed cost 1084000 4150000 Net income 230000 Less: Imputed interest charge (1000000*16%) 160000 Residual income 70000 Residual income if northeast division is acquired Net income 311000 Less: Imputed interest charge (1000000+300000+150000)*16% 232000 Residual income 79000
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