Question

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 Division					Competitor
Sales		$	4,300,000				$	2,700,000
Variable costs			70	% of sales				65	% of sales
Fixed costs		$	1,062,000				$	889,000
Invested capital		$	950,000				$	200,000

Management has determined that in order to upgrade the competitor to Megatronics’ standards, an additional $150,000 of invested capital would be needed.

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

Answer 1

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Megatronics Corporation
Calculation of Average assets	Northeast Division	Competitor
Invested capital	950,000.00	200,000.00
Average Invested capital	575,000.00
Calculation of Operating Income
	Northeast Division	Competitor	Total
Sales	4,300,000.00	2,700,000.00	7,000,000.00
Less: Variable costs	3,010,000.00	1,755,000.00	4,765,000.00
Contribution margin	1,290,000.00	945,000.00	2,235,000.00
Fixed costs	1,062,000.00	889,000.00	1,951,000.00
Operating Income	228,000.00	56,000.00	284,000.00
Answer 4	Amount $
Operating Income	284,000.00
Average Assets	575,000.00
ROI	49.39%