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?

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

%

%

  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

Homework Answers

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
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