Ans1.
Calulation of (ROI) for each division in terms of margin and turnover.
Return on Investment = Margin * Turnover
Return on Investment = ( Net operating income/Sales) * (Sales/Average operating assets)
Osaka
ROI= (808,000/ 10,100,000) * (10,100,000/2,525,000) * 100
ROI = 0.08 * 4 * 100
ROI = 0.32*100 = 32%
Yokohama
ROI = (3,100,000 /31,000,000) * (31,000,000/15,500,000) *100
ROI = 0.1 * 2 * 100
ROI = 0.2 * 100 = 20%
Osaka | Yokohama | |
Return on Investment (ROI) | 32% | 20% |
2. Compute the residual income for each division.
Osaka | Yokohama | |
Average operating assets (a) | $ 2,525,000.00 | $ 15,500,000.00 |
Net operating income (b) | $ 808,000.00 | $ 3,100,000.00 |
Minimum required return on average operatin g assets (c = 17% * a) | $ 429,250.00 | $ 2,635,000.00 |
Residual Income (b -c) | $ 378,750.00 | $ 465,000.00 |
3. Is Yokohama’s greater amount of residual income an indication that it is better managed?
No
This is because the Yokohama Division is larger as compared to Osaka Division and have a larger amount of residual income. But we can not compare the performance of divisions of different sizes by using their residual income . Always larger divisions will have more residual income. In fact, in the above case, the Osaka Division is well managed than Yokohama Division as the ROI of Osaka Division is 32% which is much higher than Yokohama Division which has only 20% ROI.
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