Question

Exercise 11-6 Contrasting Return on Investment (ROI) and Residual Income (LO11-1, LO11-2] Meiji Isetan Corp. of Japan has two regional divisions with headquarters in Osaka and Yokohama. Selected data on the two divisions follow: Sales Net operating income Average operating assets Division Osaka Yokohama $ 10,400,000 $ 34,000,000 $ 520,000 $ 2,380,000 $ 2,600,000 $ 17,000,000 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 12%. Compute the residual income for each division. 3. Is Yokohama's greater amount of residual income an indication that it is better managed?

Answer 1

	Margin = net operating income/sales
	turnover = sales/average operating assets
	ROI = margin *turnover
				Division
				Osaka	yokohama
	sales			10,400,000	34,000,000
	net operating income			520,000	2,380,000
	average operating assets			2,600,000	17,000,000
	margin			5.00%	7.00%
	turnover			4	2
1)	ROI			20.00%	14.00%	answer
	Residual income=net income-(average operating assets*min rate of return)
2)					Osaka	yokohama
	Average oprating assets				2,600,000	17,000,000
	net operating income				520,000	2,380,000
	minimum required return on average assets				12%	12%
	residual income				208000	340000
3)	N0