Reference no: EM132552430

BrightTech Fiji is a retailer of computers and electronic and has four divisions. At the end of each year the four divisional managers are evaluated and bonuses are awarded based on ROI. Last year, the company as a whole produced an ROI of 16%. The management of the company's Western Division is considering to buy the operations of a competitor, Techbuy, which intended to cease its retail operations. The following data relate to recent performance of the Western division and Techbuy:

                                 Western Division                Techbuy

Sales                              7500 000                          5600 000

Variable costs                   65% of sales                    70% of sales

Fixed costs                             2050 000                       1580 000

Invested capital                         1750 000                      595 000

If the acquisition occurs, operations of Techbuy will be absorbed into Western Division. The operations of Techbuy will need to be upgraded to meet high standards, which would require an additional invested capital of $485000.

Required

Question 1. Calculate the return on investment (ROI) of the Western division and the division if Techbuy is acquired. Explain the reaction of divisional management towards the acquisition?

Question 2. Assume that BrighTech Fiji uses residual income (RI) to evaluate performance and desires a minimum required rate of return of 10% on invested capital. a. Calculate current residual income of the Western division and the division's residual income if Techbuy is acquired. b. Explain the reaction of divisional management towards the acquisition?