Sunshine Industrial Ltd, a massive retailer of electronic products, is organised in four separate business 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%. During the past week, the divisional manager of the Asia-Pacific Division was approached about the possibility of acquiring 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 Invested capital $1,850,000 $ 625,000 Sales $8,400,000 $5,200,000 Variable costs 70% of sales 65% of sales Fixed costs $2,150,000 $1,670,000 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. Explain, with reasons, whether the management of Asia-Pacific Division would accept the acquisition (b) Do you think the corporate management (headquarters) of Sunshine would accept the acquisition? Show all computations to support your answer. (c) Assume that Sunshine uses residual income to evaluate performance and desires a 12% minimum return on invested capital. Compute the residual income of the Asia-Pacific Division for the following scenarios: (i) before the competitor is acquired. (ii) after the competitor is acquired. Explain, with reasons, whether the management of Asia-Pacific Division would change its attitude toward the acquisition compared with your answer in part (a).
Sunshine Industrial Ltd, a massive retailer of electronic products, is organised in four separate
business divisions. The four divisional managers are evaluated at year-end, and bonuses are
awarded based on
ROI of 13%.
During the past week, the divisional manager of the Asia-Pacific Division was approached
about the possibility of acquiring 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
Invested capital $1,850,000 $ 625,000
Sales $8,400,000 $5,200,000
Variable costs 70% of sales 65% of sales
Fixed costs $2,150,000 $1,670,000
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.
Explain, with reasons, whether the management of Asia-Pacific Division would accept
the acquisition
(b) Do you think the corporate management (headquarters) of Sunshine would accept the
acquisition? Show all computations to support your answer.
(c) Assume that Sunshine uses residual income to evaluate performance and desires a 12%
minimum return on invested capital. Compute the residual income of the Asia-Pacific
Division for the following scenarios:
(i) before the competitor is acquired.
(ii) after the competitor is acquired.
Explain, with reasons, whether the management of Asia-Pacific Division would change
its attitude toward the acquisition compared with your answer in part (a).
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