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 $10,200,000 $32,000,000 $ 816,000 $ 3,200,000 $ 2,550,000 $16,000,000 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 17%. 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 0

Explanation / Answer

1.

Notes :

a.ROI = Margin * Turnover

For Osaka : 8% *4

For Yokohama : 10% *2

b. Margin = Net Operating Income / Sales *100

Osaka : 816000 / 10200000 *100

Yokohama : 3200000 / 32000000 *100

c. Turnover : Sales / Average Operating Assets

Osaka : 10200000 / 2550000

Yokohama : 32000000 / 16000000

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

3. No

This is because OSaka has a higher ROI than Yokohama and ROI is a measure of the performance and management of the division

Osaka Yokohama ROI 32% 20%

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