Provided is selected data from XYZ Corporation, a company with several divisions, below. Division managers are evaluated at year-end, and bonuses are awarded based on ROI. Last year, XYZ as a whole produced a 14 percent return on its investment (ROI).
The management of XYZ Jet Division was approached about the possibility of acquiring ABC Company. If ABC were to be acquired, the investment required would be ABC net operating assets. The below data relate to recent performance of the Jet Division and ABC Company:
|
Jet Division
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ABC Company
|
|
Sales
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$4,200,000
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$2,600,000
|
|
Variable costs
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70% of sales
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65% of sales
|
|
Fixed costs
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$1,075,000
|
$835,000
|
|
Net Operating Assets
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$925,000
|
$312,500
|
Jet Division management has determined that merging ABC with XYZ operating systems would require an additional $187,500 investment in operating assets.
Required: Show all calculations
Compute the current ROI of the Jet Division. ________
What Jet Division's ROI would be if ABC Company were acquired. _______
What is the likely reaction of Jet Division's management toward this acquisition and why (Be as specific as possible)?
What would the likely reaction of XYZ top management be toward this acquisition and why (Be as specific as possible)?
Suppose that XYZ uses residual income to evaluate performance and requires a 14 percent minimum rate of return. Compute the current residual income of the Jet Division_______________
Compute what Jet Division's residual income would be if ABC Company were acquired. ________________
If Residual Income is used as the performance measure for divisions by XYZ, what would the likely reaction of Jet Division's management toward this acquisition and why (Be as specific as possible)?