Megatronics Corporation, a massive retailer of electronic products, is organized in four separate divisions. The four divisional
Question:
During the past week, management of the companys 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:
Management has determined that in order to upgrade the competitor to Megatronics standards, an additional $187,500 of invested capital would be needed.
Required:
1. Compute the current ROI of the Western Division and the divisions ROI if the competitor is acquired.
2. What is the likely reaction of divisional management toward the acquisition? Why?
3. What is the likely reaction of Megatronics corporate management toward the acquisition? Why?
4. Would the division be better off if it didnt upgrade the competitor to Megatronics standards?
Show computations to support your answer.
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 Western Division and the divisions residual income if the competitor is acquired. Will divisional management be likely to change its attitude toward the acquisition?Why?
Step by Step Answer:
Managerial Accounting Creating Value in a Dynamic Business Environment
ISBN: 978-0078025662
10th edition
Authors: Ronald Hilton, David Platt