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 $3,000,000 $9,000,000
Net operating expenses $210,000 $720,000
Average operating assets $1,000,000 $4,000,000

Required:
a. For each divisions, compute the return on investment (ROI) in terms of margin and turnover. (Do not round intermediate calculations.)
b. 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.

Answer 1

Answer:

1. Rate of Interest = Net operating expenses/Average operating assets

Osaka = $210000/$1000000 = 0.21 = 21%  

Yokohama = $720000 / $4000000 = 0.18 = 18%

2.                                                Osaka        Yokohama

Average operating assets   $1,000,000    $4,000,000

M. required return at 15%     $150,000       $600,000

Net operating income          $210,000       $720,000    

Minimum required return     $150,000       $600,000

Residual income                   $60,000       $120,000