Meijt Isetan Corp of Japan has two regional divisions with headquarters in Osaka

Question

Meijt Isetan Corp of Japan has two regional divisions with headquarters in Osaka and Yokohama Selected data on the two divisions follow For each division, compute the return on investment (ROI) in terms ot margin and turnover. (Do not round intermediate calculations.) 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. Is Yokohama's greater amount ot residual income an indication that it is better managed? Yes No

Explanation / Answer

The formula to calculate residual income is:

In the above formula,
   A = Department's net operating income;
   B = Minimum required return on assets; and
   C = Average operating assets of the department

No the greater residual income shows that it is not better managed

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 ROI = net operating income/ assets 21.00% 18.00%

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