Reference no: EM132551094

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: Sales: Western Division $7500 000 and Techbuy $5600 000, Variable costs: Western Division 65% of sales and Techbuy 70% of sales, Fixed costs: Western Division $2050 000 and Techbuy $1580 000, Invested capital: Western Division $1750 000 and Techbuy $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?

Question 3.) Discuss in detail two strategies that may be adopted by divisional management to improve ROI and RI for short-term profitability. Use examples to illustrate your answer.

Question 4.) Several approaches are used by organisations when measuring non-current assets as a component of invested capital. One approach is carrying amount. Discuss the benefits and limitations of using carrying amount to measure non-current assets to determine invested capital. Use examples to explain your answer.