Question

Exercise 11-6 Contrasting Return on Investment (ROI) and Residual Income [LO11-1, LO11-2] 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 39,000,000 3,510,000 10,900,000 763,000 $ 2,725,000 $ 19,500,000 Net operating income Average operating assets Required: 1. For each division, compute the return on invertement (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 16 %. 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 %

Answer 1

ROI = Net operating income/Average operating assets

Osaka = 763,000/2,725,000 = 28%

Yokohoma = 3,510,000/19,500,000 = 18%

Residual income = Net operating income - Required return

Osaka = 763,000 - (2,725,000*16%) = 327,000

Yokohoma = 3,510,000 - (19,500,000*16%) = 390,000

.

Yokohoma