Question

#3

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:

3. What is the likely reaction of Megatronics’ corporate management toward the acquisition? Why?

Answer 1

Return on Investment: A Return on Investment is a financial ratio that measures the performance of an investment based upon its return or net income. The higher the rate of return on investment, the better an investment is doing.

3. Solution.

Computation of Return on Investment of the Competitor.

Particulars	Amount
Sales	$4,250,000
less: Variable Costs (60% of sales)	$2,550,000
Contribution Margin	$1,700,000
less: Fixed Costs	$1,600,000
Net Income	$100,000

Return on Investment = Net Income / Cost of Investment

= $100,000 / $225,000

= 44.44%

The management of Megatronics Corporate is likely to be in favor of this acquisition. The return on investment of the Competitor is 44.44% which is three times higher than the company's last year return on investment i.e. 13%. So acquiring the competitor can really boost the return on investment of the company as a whole.

Now if we consider the possibility of upgrading the competitor with an additional investment of $275,000, the return on investment is still higher than the company's last ROI i.e. 20%.

Computation of ROI after upgrading the Competitor.

***Return on Investment = Net Income / Cost of Investment

= $100,000 / ($225,000 + 275,000)

= $100,000 / $500,000

  = 20%

***THANK YOU***