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 competitors net operating assets. The data that follow relate to recent performance of Pure's Western Division and the competitor company:

	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

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.

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1. Compute the current ROI of the Western Division.

2. What would Western Divisions ROI be if the competitor company were acquired?

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

4. What would the likely reaction of Pure's top management be toward this acquisition and why?

5. Suppose that Pure uses residual income to evaluate performance and desires a 14% minimum return on invested capital. Compute the current residual income of the Western Division.

6. Compute Western Divisions residual income if the competitor company were acquired.

7. If Residual Income is used as the performance measure for divisions by Pure, what is the likely reaction of Western Divisions management toward this acquisition and why?