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 $ 10,800,000 $ 38,000,000 Net operating income $ 648,000 $ 3,040,000 Average operating assets $ 3,600,000 $ 19,000,000 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 15%. 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

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

	Osaka	Yokohama
Margin	648000*100/10800000 = 6%	3040000*100/38000000 = 8%
Turnover	10800000/3600000 = 3	38000000/19000000 = 2
ROI	6%*3 = 18%	8%*2 = 16%

2. Assume that the company evaluates performance using residual income and that the minimum required rate of return for any division is 15%. Compute the residual income for each division.

	Osaka	Yokohama
Average operating assetss	3600000	19000000
Minimum required rate of return	15%	15%
Minimum operating income	540000	2850000
Actual operating income	648000	3040000
Residual income	108000	190000

3) No Yokohama's greater amount of residual income is not an indication that it is better managed