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

Margin = Net operating income / Sales
Turnover = Sales/Average operating assets
ROI = Margin* Turnover
1
Return on investment (ROI):
Osaka	24.0%	=(552000/9200000)*(9200000/2300000)
Yokohama	16.0%	=(1760000/22000000)*(22000000/11000000)
2
	Osaka	Yokohama
Average operating assets	2300000	11000000
Net operating income	552000	1760000
Minium Required return	299000	1430000
Residual income	253000	330000
3
No, greater amount of residual income is not an indication that it is better managed
It's ROI is less than Osaka