(solution) Provided is selected data from XYZ Corporation, a company with

(solution) Provided is selected data from XYZ Corporation, a company with

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 

ABC Company 

Sales 

$4,200,000 

$2,600,000 

Variable costs 

70% of sales 

65% of sales 

Fixed costs 

$1,075,000 

$835,000 

Net Operating Assets 

$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 

  1. Compute the current ROI of the Jet Division. ________ 
  2. What Jet Division’s ROI would be if ABC Company were acquired. _______ 
  3. What is the likely reaction of Jet Division’s management toward this acquisition and why (Be as specific as possible)? 
  4. What would the likely reaction of XYZ top management be toward this acquisition and why (Be as specific as possible)? 
  5. 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_______________ 
  6. Compute what Jet Division’s residual income would be if ABC Company were acquired. ________________ 
  7. 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)?

Requirement (1)
Sales
Variable costs
Fixed costs
Net operating income
Divided by: Average operating assets
Return on investment
Requirement (2)
Sales
Variable costs
Fixed costs
Net operating…