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

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

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#9%:!; #9%:8 .<=>?@A #9%:! /04 BCD /@EFDGB? 4CH=A@I FCJ@EKA@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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