Answer:
1. The ROI for Osaka and Yokahama is 24% and 16 % respectively
2. The residual income for Osaka and Yokahama is $245,000 and $280,000 respectively.
3. Yokohama is not better managed.
Explanation:
1. The formula to compute Return on Investment (ROI) is shown below:
= Net operating income ÷ Average operating assets
For Osaka
= $588,000 ÷ $2,450,000
= 24%
For Yokahama
= $2,240,000 ÷ $14,000,000
= 16%
Hence, The ROI for Osaka and Yokahama is 24% and 16 % respectively
2. The computation of minimum required rate of return and residual income is shown below:
Minimum required rate of return = 14% of average operating assets
And, residual income = Net operating income - Minimum required rate of return
So,
For Osaka
The Minimum required rate of return = 14 % × $2,450,000 = $343,000
And, residual income = $588,000 - $343,000 = $245,000
For Yokohama
The Minimum required rate of return = 14 % × $14,000,000 = $1,960,000
And, residual income = $2,240,000 - $1,960,000 = $280,000
Hence, the residual income for Osaka and Yokahama is $245,000 and $280,000 respectively.
3. The greater amount of residual income doesn't mean that Yokohama is better managed. Here, the ROI and Net operating assets is to be considered for better managing.
So, Yokohama is not better managed.
