Question

#2

REVISED PROBLEM 13-42

ACC 650 - Management Accounting

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:

	NE DIVISION	COMPETITOR
SALES	$8,600,000	$4,250,000
VARIABLE COSTS	75% of sales	60% of sales
FIXED COSTS	$1,800,000	$1,600,000
INVESTED CAPITAL	$3,100,000	$225,000

Management has determined that in order to upgrade the competitor to Megatronics’ standards, an
additional $275,000 of invested capital would be needed.

REQUIRED:

2. What is the likely reaction of divisional management toward the acquisition? Why?

Answer 1

The divisional management might accept the idea of the acquisition. This is beacuse the operations of the competitor is quite well. As we can see that the competitor is earning good ROI that is 44.44% which is in fact larger than the company's own ROI.

Also the contribution percentage on the sales is higher of the competitor. Only the fixed costs are very high. If the fixed costs could be controlled, the overall profit of the company will increase. Also there are benefits of increased customer base, financial and human resources , competition will be reduced and the market share of the comapny will also increase.

The additional investment can be used to control the fixed costs and set new methods and procedures for operation. This will benefit the company in the long run.