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 $ 9,100,000 $ 21,000,000 Net operating income $ 455,000 $ 1,470,000 Average operating assets $ 2,275,000 $ 10,500,000 Required: 1. For each division, compute the return on investment (ROI) in terms of margin and turnover. 2. Assume that the company evaluates performance using residual income and that the minimum required rate of return for any division is 12%. Compute the residual income for each division. 3. Is Yokohama’s greater amount of residual income an indication that it is better managed?

Explanation / Answer

1) ROI = Net operating income/Average operating assets Osaka 455000/2275000 20.00% Yokohama 1,470,000/10,500,000 14.00% 2) Residual income = net operating income -(Average operating assets * min rate of return) Osaka 455,000 - (2275000*12%) 182000 Yokohama 1,470,000 - (10,500,000*12%) 210000 3) No

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