Question

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 $ 9,900,000 $ 29,000,000
Net operating income $ 792,000 $ 2,900,000
Average operating assets $ 2,475,000 $ 14,500,000

(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 17%. Compute the residual income for each division.
(3) Is Yokohama’s greater amount of residual income an indication that it is better managed?

Answer 1

Please check the info below

Step-by-step explanation:

1. For Osaka

Margin = Net Operating Income / Sales *100

= $ 792000 / $9900000 *100

= 8.00%

Turnover = Sales / Average Operating Assets * 100

= $ 9900000 / $ 2475000 * 100

= 4.00%

ROI = Margin * Turnover

= 8% *4 %

= 32.00%

Hence the correct answer is 32.00%

For Yokohama :

Margin = Net Operating Income / Sales *100

= $ 2900000 / $ 29000000*100

= 10.00%

Turnover = Sales / Average Operating Assets * 100

= $ 29000000 / $ 14500000* 100

= 2.00%

ROI = Margin * Turnover

= 10% *2 %

= 20.00%

Hence the correct answer is 20.00%

2. The correct answer is

Osaka = $ 371,250

Yokohama = $ 435,000

3. The correct answer is No

This is because since Osaka has a higher ROI, Yokohama’s greater amount of residual income is not an indication that it is better managed