Question

# Meiji Isetan Corp. of Japan has two regional divisions with headquarter in Osaka and Yokohama. Selected...

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

 Division Osaka Sales \$ 10,200,000 \$ 32,000,000 Net operating income \$ 816,000 \$ 3,200,000 Average operating assets \$ 2,550,000 \$16,000,000

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 17%. Compute the residual income for each division.
3. Is Yokohama’s greater amount of residual income an indication that it is better managed?
1. For each division, compute the return on investment (ROI) in terms of margin turnover.
 Osaka Yokohama ROI % %
1. Assume that the company evaluates performance using residual income and that the minimum required rate of return for any division is 17%. Compute the residual income for each division.
 Osaka Yokohama Residual income % %
1. Is Yokohama’s greater amount of residual income an indication that it is better managed?
 Yes No

solution :

 Osaka Yokohama ROI 32% 20%
 Notes : a.ROI = Margin * Turnover For Osaka : 8% *4 For Yokohama : 10% *2 b. Margin = Net Operating Income / Sales *100 Osaka : 816000 / 10200000 *100 Yokohama : 3200000 / 32000000 *100 c. Turnover : Sales / Average Operating Assets Osaka : 10200000 / 2550000 Yokohama : 32000000 / 16000000 2. Residual Income = Net Operating Income - (  Average Operating Assets * Minimum Required Return)
 Osaka Yokohama Average Operating Assets 25,50,000 1,60,00,000 Net Operating Income 8,16,000 32,00,000 Minimum Required Rate of Return 17% 17% Residual Income 382,500 480,000 3. No This is because OSaka has a higher ROI than Yokohama and ROI is a measure of the performance and management of the division

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