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?

Answer 1

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.