Question

Sunshine Industrial Ltd, a massive retailer of electronic products, is organised in four separate
divisions. The four divisional managers are evaluated at year-end, and bonuses are awarded
based on return on investment (ROI). Last year, the corporation as a whole achieved a ROI of
13 percent.
During the past week, the divisional manager of the Asia-Pacific Division was approached
about the possibility of buying a competitor that had decided to redirect its retail activities. The
following data relates to the recent performance of the Asia-Pacific Division and the competitor:
Asia-Pacific Division Competitor
Sales $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 Sunshine’s standards,
an additional $375,000 of invested capital would be needed.
Required:
(a) Compute the ROI of the Asia-Pacific Division for the following scenarios:
(i) before the competitor is acquired.
(ii) after the competitor is acquired.

(b) Do you think the management of Asia-Pacific Division would accept the acquisition?
Provide explanation to your answer.

(c) Do you think the corporate management of Sunshine would accept the acquisition? Show
all computations to support your answer.

(d) Assume that Sunshine uses residual income to evaluate performance and desires a 12
percent minimum return on invested capital. Compute the residual income of the AsiaPacific Division for the following scenarios:
(i) before the competitor is acquired.
(ii) after the competitor is acquired.

(e) Will the Asia Pacific Division management be likely to change its attitude toward the
acquisition? Provide explanation to your answer.

Answer 1