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	$	9,600,000	$	26,000,000
Net operating income	$	672,000	$	2,340,000
Average operating assets	$	3,200,000	$	13,000,000

Required:
1.	For each division, compute the return on investment (ROI) in terms of margin and turnover. (Do not round intermediate calculations. Enter your answers as a percent (i.e., 0.12 should be entered as 12).)
	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 16%. Compute the residual income for each division.
	Osaka Yokohama Average operating assets Net operating income Minimum required return on average assets Residual income $0 $0

      

3.	Is Yokohama’s greater amount of residual income an indication that it is better managed?
	Yes No

Answer 1

Requirement 1

ROI= Net income/Total Operating Assets x100

	Osaka	Yokohama
Net operating income	$ 672,000.00	$     2,340,000.00
Average operating assets	$ 3,200,000.00	$   13,000,000.00
ROI	21.00%	18.00%

Requirement 2

	Osaka	Yokohama
Average operating assets	$      3,200,000.00	$   13,000,000.00
Net operating income	$         672,000.00	$     2,340,000.00
Minimum required return on average assets	$         512,000.00	$     2,080,000.00
Residual income	$         160,000.00	$        260,000.00

Minimum required return on average assets

=3200000*16%

=13000000*16%

Requirement 3

Answer--- No

Yokohama is not managed better than Osaka because Osaka has more return than expected. Required Rate of return is 16% and Osaka gives 21% which is 5% more than required but Yokohama gives only 2% more than required return.