Question

Meiji Isetan Corp. of Japan has two regional divisions with headquarters in Osaka and Yokohama. Selected data on the two divisions follow:

	Division
	Osaka		Yokohama
Sales	$	9,200,000	$	22,000,000
Net operating income	$	552,000	$	1,760,000
Average operating assets	$	2,300,000	$	11,000,000

Required:

1. For each division, compute the return on investment (ROI) in terms of margin and turnover.

2. Assume that the company evaluates performance using residual income and that the minimum required rate of return for any division is 13%. Compute the residual income for each division.

3. Is Yokohama’s greater amount of residual income an indication that it is better managed?

Answer 1

• Requirement 1

Working		Osaka	Yokohama
A	Sales	$9,200,000	$22,000,000
B	Net Operating Income	$552,000	$1,760,000
C	Average Operating assets	$2,300,000	$11,000,000
D = [B/A] x 100	Margin	6.00%	8.00%
E = A/C	Turnover	4.00	2.00
F = [B/C] x 100 or D x E	Return on Investment [ROI]	24.00%	16.00%

• [2]

Working		Osaka	Yokohama
A	Average Operating Assets	$2,300,000	$11,000,000
B	Net Operating Income	$552,000	$1,760,000
C = A x 13%	Minimum Required ROA	$299,000	$1,430,000
D = B - C	Residual Income	$253,000	$330,000

• [3]

NO, its not the indicator, because ROI of Yokohama is LOWER than Osaka’s.