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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 company$$s 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:

Northeast DivisionCompetitorSales $$8,400,000$ $$5,200,000$ Variable costs $70\%$ of sales $65\%$ of sales Fixed costs $$2,150,000$ $$1,670,000$ Invested capital $$1,850,000$ $$625,000$

Management has determined that in order to upgrade the competitor to Megatronics$$ standards, an additional $$375,000$ of invested capital would be needed.

Required:

$1.$ Compute the current ROI of the Northeast Division and the division$$s ROI if the competitor is acquired.

$2.$ If divisional management is being evaluated on the basis of ROI, will the Northeast Division likely pursue acquisition of the competitor? NO

$3-$a$.$ Compute the ROI of the competitor as it is now and after the intended upgrade.

$3-$b$.$ If ROI is used as the basis for evaluation, would Megatronics Corporation likely be in favor of the acquisition of the competitor? YES, EVEN WITH UPGRADING

$4.$ Calculate the Northeast Division's ROI after acquisition of competitor but before upgrading.

$5-$a$.$ 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 Northeast Division and the division$$s residual income if the competitor is acquired.

$5-$b$.$ If divisional management is being evaluated on the basis of residual income, will the Northeast Division likely pursue acquisition of the competitor? YES

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