Question

Tan Corporation of Japan has two regional divisions with headquarters in Osaka and Yokohama. Selected data on the two divisions follow: Division Osaka Yokohama Sales $ 9,500,000 $ 25,000,000 Net operating income $ 855,000 $ 2,750,000 Average operating assets $ 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.

Answer 1

1. Osaka

Margin = Net Operating Income / Sales

Margin = $855,000 / $9,500,000

Margin = 9%

Turnover = Sales / Average Operating Assets

Turnover = 9,500,000 / $2,375,000

Turnover = 4

ROI = Margin * Turnover

ROI = 9% * 4

ROI = 36%

Yokohama

Margin = $2,750,000 / $25,000,000

Margin = 11%

Turnover = Sales / Average Operating Assets

Turnover = 25,000,000 / 12,500,000

Turnover = 2

ROI = Margin * Turnover

ROI = 11% * 2

ROI = 22%

2. Particulars Osaka Yokohama

Average operating assets(A) $2,375,000 $12,500,000

Required rate of return(B) 18% 18%

Minimum required return(A*B)=C $427,500 $2,250,000

Actual operating income (D) $855,000 $2,750,000

Residual income(D-C)=E $427,500 $500,000