Meiji Isetan Corp. of Japan has two regional divisions with headquarters in Osak

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 Net operating income Average operating assets S 10,100,000 $ 31,000,000 S 808,000 3,100,000 2,525,000 $15,500,000 Required 1. For each division, compute the return on investment (ROl) in terms of margin and turnover. (Do not round intermediate calculations) 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 17%. Compute the residual ncome for each division. Osaka Yokohama Average operating assets Net operating income Minimum required return Residual income

Explanation / Answer

1 ROI = Net operating income / Average operating asset*100 Osaka Yokohama Net Operating income (a) 808000 3100000 Average Operating assets (b) 2525000 15500000 ROI (a/b) 32.00% 20.00% 2 Osaka Yokohama Average Operating assets (a) 2525000 15500000 Net Operating income (b) 808000 3100000 Minimum required return @17% (c=a*17%) 429250 2635000 Residual income (b-c) 378750 465000 3 No, because Yokohama has greater residual income but lower ROI

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