#2

REVISED PROBLEM 13-42

ACC 650 - Management Accounting

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 ROI. Last year, the company as a whole produced a 13 percent return on its investment. During the past week, management of the companys Northeast 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 Northeast Division and the competitor:

	NE DIVISION	COMPETITOR
SALES	$8,600,000	$4,250,000
VARIABLE COSTS	75% of sales	60% of sales
FIXED COSTS	$1,800,000	$1,600,000
INVESTED CAPITAL	$3,100,000	$225,000

Management has determined that in order to upgrade the competitor to Megatronics standards, an additional $275,000 of invested capital would be needed.

REQUIRED:

2. What is the likely reaction of divisional management toward the acquisition? Why?