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 $ 9,800,000 $ 28,000,000 Net operating income $ 588,000 $ 2,240,000 Average operating assets $ 2,450,000 $ 14,000,000 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 14%. Compute the residual income for each division. 3. Is Yokohama’s greater amount of residual income an indication that it is better managed?

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

	Osaka Yokohama ROI      % %

Assume that the company evaluates performance using residual income and that the minimum required rate of return for any division is 14%. Compute the residual income for each division.

	Osaka Yokohama Residual income

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

	Yes No

Answer 1

Answer:-1)-Return on Investment =(Net operating income/Sales)*(Sales*Average operating assets)

Osaka Division =($588000/$9800000)*($9800000*$2450000)

=6%*4

= 24%

Yokohama Division=($2240000/$28000000) *($28000000/$14000000)

=8%*2

=16%

2)- Residual Income:- Net operating income-(Minimum return required of return* Average operating assets)

Osaka Division = $588000-(14%*2450000)

= $588000-$343000

= $245000

Yokohama Division = $2240000-(14%*14000000)

= $2240000-$1960000

= $280000

3)-No, Yokohama’s greater amount of residual income it does not indicate that it is better managed. Yokohama division is larger than the Osaka Division and for this reason one would expect that it would have a greater amount of residual income. Residual income can’t to be used to compare the performance of divisions of different sizes. In terms of ROI Osaka have (ie- 24%) greater than Yokohama (ie-16%) hence the Yokohama division does not appear to be well managed as the Osaka Division.