Question

Tan Corporation of Japan has two regional divisions with headquarters in Osaka and Yokohama. Selected data on the two divisions follow:

	Division
	Osaka		Yokohama
Sales	$	10,100,000	$	31,000,000
Net operating income	$	808,000	$	3,100,000
Average operating assets	$	2,525,000	$	15,500,000

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.

Answer 1

Answer
1
ROI = Net operating income / Average operating asset*100
	Osaka	Yokohama
Net Operating income (a)	$             808,000	$                   3,100,000
Average Operating assets (b)	$          2,525,000	$                 15,500,000
ROI (a/b)	32%	20%
2	Osaka	Yokohama
Average Operating assets (a)	$          2,525,000	$                 15,500,000
Net Operating income (b)	$             808,000	$                   3,100,000
Minimum required return @17% (c=a*17%)	$             429,250	$                   2,635,000
Residual income (b-c)	$             378,750	$                      465,000