Meiji Isetan Corp. of Japan has two regional divisions with headquarters in Osak
ID: 2447429 • Letter: M
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 $11,000,000 $40,000,000
Net operating income $880,000 $4,000,000
Average operating assets $2,750,000 $20,000,000
Required:
1. For each division, compute the return on investment (ROI) in terms of margin and turnover. (Do not round intermediate calculations. Enter your answers as a percent (i.e., 0.12 should be entered as 12).)
Osaka Yokohama
ROI % %
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.
Osaka Yokohama
Average operating assets
Net operating income
Minimum required return on average assets
Residual Income
3. Is Yokohama’s greater amount of residual income an indication that it is better managed?
Yes
No
Explanation / Answer
Ans
Ans 1 ROI Osaka Yokohama Operating Margin %=Net Operating income/Sales 8.0% 10% Asset Turnover=sales/Average Operating Assets 4 2 ROI=Operating Margin % * Asset turnover 32% 20% Ans 2 Residula Income Average operating assets 27,50,000.00 200,00,000 Net operating income 8,80,000 40,00,000 Minimum required return 18% 18% Minimum required return on average assets 4,95,000.00 36,00,000.00 Actual Return 8,80,000.00 40,00,000.00 Residual Income 3,85,000.00 4,00,000.00 Ans 3 No Residual income does not measure the efficiency with which the available capital (asset) is managed . In other words it does not measure the per $ return of capital invested