Question

In: Accounting

Meiji Isetan Corp. of Japan has two regional divisions with headquarters in Osaka and Yokohama

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 $ 10,000,000 $ 30,000,000
Net operating income $ 700,000 $ 2,700,000
Average operating assets $ 2,000,000 $ 15,000,000
 

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 15%. Compute the residual income for each division.

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

Required 1

ROI Osaka? % Yokohama? %

Required 2

Assume that the company evaluates performance using residual income and that the minimum required rate of return for any division is 15%. Compute the residual income for each division.

Residual Income Osaka? Yokohoma?

Solutions

Expert Solution

1. Computation of Return in Investment (ROI)    
Meiji Isetan Corp.    
  Division  
  Osaka Yokohama
Sales  $     10,000,000  $ 30,000,000
Net operating income  $          700,000  $   2,700,000
Average operating assets  $       2,000,000  $ 15,000,000
     
Margin (Net operating income ÷ Sales) 7.00% 9.00%
     
Turnover (Sales ÷Average operating assets) 5 2
     
Return on Investment (Margin × Turnover) 35% 18%

 

 

Requirement 2 :

 

  Osaka Yokohama
Average operating assets (a)  $         2,000,000  $      15,000,000
Net operating income   [ 1 ]  $            700,000  $        2,700,000
Minimum required return on average    
operating assets: 15% × (a) …. [2 ]  $            300,000  $        2,250,000
Residual income  [ 1 - 2 ]  $            400,000  $           450,000


Residual income can’t be used to compare the performance of divisions of different size.

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