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. Osaka Yokohama ROI Required 1 Required 2 >

Answer 1

Requirement: 1 ROI = Net operating income / Average operating assets Osaka Net operating income 855000 Average operating assets 2375000 ROI 36% Yokohama 2750000 12500000 22% Requirement: 2 Residual Income = Operating Income -(Operating assets * Cost of capital) Osaka Yokohama Net operating Income 855000 2750000 Less: Cost of capital 2,375,000 * 18% 427500 12,500,000 * 18% 2250000 Residual Income 427500 500000 Requirement: 3 Answer NO No Residual income Can't be used to compare performance of divisions of different size.