Meiji Isetan Corp. of Japan has two regional divisions with headquarters in Osak
ID: 2581940 • 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 Average operating assets2,750,000 20,000,000 $11,000,00040,000,000 $ 880,000 4,000,000 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 18%. 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
Return On Investment in terms of Margin and turnover
For this we will follow three steps
Step 1
Calculate profit margin ratio i.e. {(operating Income/Total sales)*100}
Osaka = (880,000/11,000,000)*100 = 8%
Yokohama= (4,000,000/40,000,000)*100 = 10%
Step 2
Calculate Asset (Investment) turnover ratio i.e. {(Sales/Total Assets)*100}
Osaka = (11,000,000/2,750,000)*100 = 400%
Yokohama= (40,000,000/20,000,000)*100 = 200%
Step 3
ROI = Profit Margin ratio * Asset Turnover Ratio
Osaka = 8% * 400% = 32%
Yokohama= 10% * 200% = 20%
(2)
Residual Income = Net operating Income – Cost of Capital (i.e. Minimum required rate of return)
Osaka = 880,000 – (18% * 2,750,000)
Osaka = 385,000
Yokohama= 4,000,000 – (18% * 20,000,000)
Yokohama = 400,000
(3)
No Yokohama greater amount of residual Income is NOT an indication of better management but it’s a VICE-VERSA, It is an indication of BAD management as it is earning only 20% on its investment but OSAKA is earning 32% on its investment, Osaka is better company and has better management than Yakohama.