Megatronics Corporation, a massive retailer of electronicproducts, is organized in four separate divisions. The fourdivisional managers are evaluated at year-end, and bonuses areawarded based on ROI. Last year, the company as a whole produced a15 percent return on its investment.

During the past week, management of the company’s NortheastDivision was approached about the possibility of buying acompetitor that had decided to redirect its retail activities. (Ifthe competitor is acquired, it will be acquired at its book value.)The data that follow relate to recent performance of the NortheastDivision and the competitor:

	Northeast Division					Competitor
Sales		$	4,370,000				$	2,770,000
Variable costs			70	% of sales				65	% of sales
Fixed costs		$	1,102,000				$	917,500
Invested capital		$	950,000				$	200,000

Management has determined that in order to upgrade thecompetitor to Megatronics’ standards, an additional $125,000 ofinvested capital would be needed.

Required:

1. 1. Compute the current ROI of the NortheastDivision and the division’s ROI if the competitor is acquired.

2. 2. If divisional management is being evaluatedon the basis of ROI, will the Northeast Division likely pursueacquisition of the competitor?

3. 3-a. Compute the ROI of the competitor as it isnow and after the intended upgrade.

4. 3-b. If ROI is used as the basis forevaluation, would Megatronics Corporation likely be in favor of theacquisition of the competitor?

5. 4. Calculate the Northeast Division's ROI afteracquisition of competitor but before upgrading.

6. 5-a. Assume that Megatronics uses residualincome to evaluate performance and desires a 12 percent minimumreturn on invested capital. Compute the current residual income ofthe Northeast Division and the division’s residual income if thecompetitor is acquired.

7. 5-b. If divisional management is beingevaluated on the basis of residual income, will the NortheastDivision likely pursue acquisition of the competitor?