You are provided with the below-selected data from Pure Corporation, a company w

Question

You are provided with the below-selected data from Pure Corporation, a company with
several divisions. Division managers are evaluated at year-end, and bonuses are awarded based on ROI. Last year, Pure Corporation as a whole, produced a 14 percent return on its investment(ROI).

Just recently, the management of Pure's Western 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
Pure's Western Division and the competitor company:

Western Division management has determined that merging the competitor company with
Pure'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.

Show All Work

1. Compute the current ROI of the Western Division.

2. What would Western Division’s ROI be if the competitor company were acquired?

3. What is the likely reaction of Western Division’s management toward this acquisition and
why?

Pure Western Division Competitor Company Sales $4,400,000 $2,600,000 Variable Costs 65% of sales 70% of sales Fixed Costs $1,100,000 $950,00 Net Operating Assets $1,200,000 $100,000

Explanation / Answer

1. Current ROI of the Western Division is 36.67%

2. If the competitor company were acquired, Western division's ROI would be 86.53%.

3. Western division's management would most likely go ahead with this acquisition as it is turning out to be a profitable acquisition. The ROI of the division will increase manifold after the acquisition.

DETAILS PURE WESTERN DIVISION COMPETITOR COMPANY DIVISION IF COMPETITOR IS ACQUIRED Sales $4,400,000 $2,600,000 $7,000,000 Variable Costs (2,860,000) (1,820,000) (4,680,000) Contribution Margin 1,540,000 780,000 2,320,000 Fixed Costs (1,100,000) (95,000) (1,195,000) Operating Income 440,000 685,000 1,125,000 Net Operating Assets 1,200,000 100,000 1,300,000 ROI = Operating Income / Net Operating Assets 36.67% 685% 86.53%

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