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 $ 3,000,000 $ 9,000,000 Net operating income $ 210,000 $ 720,000 Average operating assets $ 1,000,000 $ 4,000,000 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.

Answer 1

Answer:

Return on Investment (ROI)

In terms of margin :

Division Osaka (ROI) = 21.00 %

Division Yokohama (ROI) = 18.75%

In terms of turnover :

Division Osaka (ROI) = 300%

Division Yokohama (ROI) = 225%

Residual Income

Division Osaka  =   $60,000

Division Yokohama  =  $120,000

Explanation:

Return on Investment = Divisional Profit Contribution / Assets Employed in the Division x 100

In terms of margin  :

Division Osaka (ROI) = $ 210,000 / $ 1,000,000 x 100 = 21.00 %

Division Yokohama (ROI) = $ 720,000 / $ 4,000,000 x 100 = 18.75%

In terms of turnover :

Division Osaka (ROI) = $ 3,000,000 / $ 1,000,000 x 100 = 300%

Division Yokohama (ROI) = $ 9,000,000 / $ 4,000,000 x 100 = 225%

Residual Income = Controllable Profit - Cost of Capital Charge on Investment Controllable by Divisional Manager

Division Osaka  = $ 210,000 - $ 1,000,000 x 15% =  $60,000

Division Yokohama  = $ 720,000 - $ 4,000,000 x 15% = $120,000