Question

Meiji Isetan Corp. of Japan has two regional divisions with headquarters in Osaka and Yokohama. Selected data on the two divisions follow Sales Net operating income Average operating assets $ $ $ Division Osaka Yokohama 9,500,000 $ 25,000,000 855,000 $ 2,750,000 2,375,000 $ 12,500,000 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 18%. Compute the residual income for each division 3. Is Yokohama's greater amount of residual income an indication that it is better managed? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 For each division, compute the return on investment (ROI) in terms of margin and turnover.

Answer 1

Solution 1:

Profit Margin
Division	Choose Numerator		/	Choose denominator		=	Profit Margin
	Details	Amount		Details	Amount
Osaka	Operating Income	$855,000.00	/	Sales	$9,500,000.00	=	9.00%
Yokohama	Operating Income	$2,750,000.00	/	Sales	$25,000,000.00	=	11.00%
Investment Turnover
Division	Choose Numerator		/	Choose denominator		=	Investment Turnover
	Details	Amount		Details	Amount
Osaka	Sales	$9,500,000.00	/	Average operating assets	$2,375,000.00	=	4.00
Yokohama	Sales	$25,000,000.00	/	Average operating assets	$12,500,000.00	=	2.00

Return on Investment - Expended Formula
Division	Profit Margin	*	Investment Turnover	=	Return on Investment
Osaka	9.00%	*	4.00		36.0%
Yokohama	11.00%	*	2.00		22.0%

Solution 2:

Particulars	Osaka	Yokohama
Average investment	$2,375,000.00	$12,500,000.00
target return	18%	18%
Target income	$427,500.00	$2,250,000.00
Operating income	$855,000.00	$2,750,000.00
Target income	$427,500.00	$2,250,000.00
Residual income	$427,500.00	$500,000.00

Solution 3:

No, Yokohama greater amount of residual income is not an indication that it is better managed.