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Chocolate Enterprise is a multi-division company. The current ROI for Chocolate Enterprise as a whole is 11%, and Chocolate Enterprise has a minimum required rate of return on all investments of 10%. The most successful division within Chocolate Enterprise is the Boxed Candy division. Currently the boxed candy division has total assets of $2,000,000 with operating income of $400,000. The manger of the Boxed Candy division is considering the purchase of a small company called Truffles Inc. The purchase of Truffles Inc. will require an investment of $800,000 and with the synergy between the two companies will increase the Boxed Candy Division operating income by $76,000. Bonuses in all the Chocolate Enterprise Divisions are awarded to mangers with increasing ROI's.
-If the Boxed Candy Division purchases Truffle, Inc., and income increases as expected, what will happen to the ROI of Chocolate Enterprise?
A) It will go down
B) It will stay the same
C) It will go up
D) Cannot be determined from the information given

Question

Quizplus · Accepted Answer

The ROI for the Boxed Candy division before the purchase is calculated as $400,000 / $2,000,000 = 20%. After purchasing Truffles Inc., the total assets become $2,800,000 ($2,000,000 + $800,000) and the operating income becomes $476,000 ($400,000 + $76,000). The new ROI is $476,000 / $2,800,000 = 17%. Since the ROI decreases from 20% to 17% for the Boxed Candy division, and this division is part of Chocolate Enterprise, the overall ROI of Chocolate Enterprise will go down.

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