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201-SELF STUDY PROB-WEEK 15-S'12

# 201-SELF STUDY PROB-WEEK 15-S'12 -...

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#9%:!; #9%:8 .<=>[email protected] #9%:! /04 BCD /@EFDGB? [email protected] [email protected]@CK @JB?GBKF=C PROBLEM 13-42 (35 MINUTES) 1. Current ROI of the Northeast Division: Sales revenue…………………………………… \$8,400,000 Less: Variable costs (\$8,400,000 x 70%)…… \$5,880,000 Fixed costs………………………………. . 2,150,000 8,030,000 Income……………………………………………. . \$ 370,000 ROI = Income ÷ invested capital = \$370,000 ÷ \$1,850,000 = 20% Northeast’s ROI if competitor is acquired: Sales revenue (\$8,400,000 + \$5,200,000)……. \$13,600,000 Less: Variable costs [\$5,880,000 + (\$5,200,000 x 65%)]………………… \$9,260,000 Fixed costs (\$2,150,000 + \$1,670,000). .. 3,820,000 13,080,000 Income……………………………………………. .. \$ 520,000 ROI = Income ÷ invested capital = \$520,000 ÷ [\$1,850,000 + (\$625,000 + \$375,000)] = 18.25% 2. Divisional management will likely be against the acquisition because ROI will be lowered from 20% to 18.25%. Since bonuses are awarded on the basis of ROI, the acquisition will result in less compensation. 3. An examination of the competitor’s financial statistics reveals the following: Sales revenue……………………………………. . \$5,200,000 Less: Variable costs (\$5,200,000 x 65%)……. . \$3,380,000 Fixed costs ………………………………. . 1,670,000 5,050,000 Income……………………………………………. .. \$ 150,000 ROI = Income ÷ invested capital = \$150,000 ÷ \$625,000 = 24% PROBLEM 13-42 (CONTINUED) Corporate management would probably favor the acquisition. Megatronoics has been

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201-SELF STUDY PROB-WEEK 15-S'12 -...

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