You have been provided with the below selected data from World Corporation, a company with several divisions. Division managers are evaluated at year-end, and bonuses are awarded based on ROI. Last year, World Corporation as a whole, produced a 14 percent return on its investment (ROI).

Just recently, the management of World's Eastern Division was approached about the possibility of acquiring a competitor. If the competitor is acquired, the investment required would be the competitor's net operating assets. The data that follow relate to recent performance of World's Eastern Division and the competitor company:

Eastern Div Competitor

Sales $4,400,000.00 $2,600,000.00

Variable Costs 65% of sales 70% of sales

Fixed Costs $1,100,000.00 $950,000.00

Net Operating Assets $1,200,000.00 $100,000.00

Eastern Division management has determined that merging the competitor company with World'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.

Required: Show all calculations.

1. Compute the current ROI of the Eastern Division.

2. What would Eastern Division's ROI be if the competitor company were acquired?

3. What is the likely reaction of Eastern Division's management toward this acquisition and why (Be as specific as possible)?

4. What would the likely reaction of World's top management be toward this acquisition and why (Be as specific as possible)?

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

6. Compute Eastern Division's residual income if the competitor company were acquired.

7. If Residual Income is used as the performance measure for divisions by World, what is the likely reaction of Eastern Division's management toward this acquisition and why (Be as specific as possible)?