Megatronics Corporation, a massive retailer of electronic products, IS organized In four separate...


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 ROl. Last year, the company as a whole produced a 14 percent return on its investment.

During the past week, management of the company's Western 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 Western Division and the competitor:

Western Division Competitor
Sales $4,210,000 $2,610,000
Variable costs 70% of sales 60% of sales
Fixed costs $1,074,000 $98,000
Invested capital $900,000 $304,000

Management has determined that in order to upgrade the competitor to Megatronics standards, an additional $171,000 of invested capital would be needed.

3-a. Compute the ROl of the competitor as it is now and after the intended upgrade. Round your ROI to 2 decimal places.

ROI before Upgrading 25.00%
ROI after upgrading ____%

3-b. If ROl is used as the basis for evaluation, would Megatronics Corporation likely be in favor of the acquisition of the competitor?

a. No

b. Yes, but only without upgrading

c. Yes, even with upgrading

Return on Investment:

Return on investment represents the relationship between operating income and the invested capital. It is used to measure the performance of divisions and evaluate prospective investments.

Answer and Explanation: 1

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Western Division Competitor now Competitor after upgrade
Contribution margin $1,263,000
($4,210,000 x 0.30)
$1,044,000 $1,044,000

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Learn more about this topic:

Return on Investment: Definition, Formula & Example


Chapter 25 / Lesson 6

Find out how to calculate the return on investment. View the return on investment formula applied to real-world examples and explore how to analyze ROI.

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