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 Sales Net operating income Average operating assets Yokohama $ 9,800,000 $ 28,000,000 $ 588,000 $ 2,240,000 $ 2,450,000 $ 14,000,000 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 ROl 2. Assume that the company evaluates performance using residual income and that the minimum required rate of return for any division is 14%. 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? O Yes O No

Explanation / Answer

1.

The correct answer is :

Note :

Margin = Net Operating Income / Sales *100

Turnover = Sales / Average Operating Assets

ROI = Margin * Turnover

For Osaka:

Margin = 588,000 / 9,800,000*100

Turnover =  9,800,000 /2450000

ROI = 6% * 4%

= 24%

For Yokohama:

Margin = 2240000/28000000*100

Turnover =  28000000 /14000000

ROI =8% *2%

=16%

2. Residual Income = Net Operating Income - ( AverageOperating Assets * Minimum Required Return)

3 .The correct answer is No.

Since the ROI of Osaka division is higher it is better managed.

Osaka Yokohama ROI 24% 16%

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