Meiji Isetan Corp. of Japan has two regional divisions with headquarters in Osak
ID: 2581031 • Letter: M
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 10,500,000 35,000,000 $630,000 2,800,000 Average operating assets 3,500,000 17,500,000 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 15%. Compute the residual income for each division. 3. Is Yokohama's greater amount of residual income an indication that it is better managed? Complete this question by entering your answers in the tabs below.Explanation / Answer
1)
*)ROI in terms of margin = Net operating income ÷ Average operating assets
osaka =630000÷3500000=.18 OR 18%
yokohama =2800000÷17500000= .16 OR 16%
*)ROI in terms of turnover = sales ÷ average operating assets
osaka =10500000÷3500000 = 3
yokohama =35000000÷17500000= 2
2)Residual income (RI) = Operating income - Desired operating income
osaka =
operaring income =630000
desired operating income = average operating assets × required rate of return
=3500000×.15=525000
RI = 630000-525000=105000
yokohama =
operating income =2800000
desired operating income = 17500000×.15=2625000
RI = 2800000-2625000=175000
3) We can't simply say that yokohama is better managed than osaka.In this situation company can't use a common Required rate of return for both the segments because yokohama uses huge investment than osaka so definetly it should contribute more.so we can't easly compare it only with the RI results. if segments evaluated by RI the segment managers could avoid the training and other discretionary expenses to overstate net income and also try to reduce the value of operating assets. these actions leads to an increase in residual income with out increasing the efficiency of that division. so we can't say that yokohama's greater amount of residual income indicates that it better managed.