Question

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?

Complete this question by entering your answers below:

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

	Osaka		Yokohama
ROI		%		%

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.

	Osaka		Yokohama
Residual income		%		%

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

• Yes

• No

Answer 1

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