Megatronics Corporation, a massive retailer of electronic products, IS organized In four separate...
Question:
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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3-a.
| Western Division | Competitor now | Competitor after upgrade | |
|---|---|---|---|
| Contribution margin | $1,263,000 ($4,210,000 x 0.30) | $1,044,000 | $1,044,000 |
| Fixed... |
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Chapter 25 / Lesson 6Find 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.