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 $ 3,000,000 $ 9,000,000 Net operating income $ 210,000 $ 720,000 Average operating assets $ 1,000,000 $ 4,000,000 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 15%. 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

1. Return on Investment = Sales Margin / Capital turnover

= (Net income / Sales) ÷ (Assets / Sales)

Osaka:

= (210,000 / 3,000,000) ÷ (1,000,000 / 3,000,000)

= 0.07 / 0.33

= 21%

Yokohama

= (720,000 / 9,000,000) ÷ (4,000,000 / 9,000,000)

= 0.08 / 0.44

= 18%

2. Residual income = Operating income * (Required return * Average operating assets)

Osaka = 210,000 - (15% * 1,000,000)

= $60,000

Yokohama = 720,000 - (15% * 4,000,000)

= $120,000

c. No is isn't because Residual income is not a good matric to use to compare companies or departments as it does not show the amount of assets used by the companies being compared.