Exercise 11-6 Contrasting Return on Investment (ROI) and Residual Income [LO11-1

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: Division Osaka Sales Net operating income Average operating assets Yokohama 5 9,900,000 29,000,000 5 792,000 2,900,000 5 2.475,000 14,500,000 Required: 1. For each division, compute the return on investment (ROI) in terms of margin and turnover Osaka Yokohama ROI 2. Assume that the company evaluates performance using residual income and that the minimum required rate of return for any division is 17%. Compute the residual income for each division. Osaka Yokohama Average operating assets Net operating income Minimum required return on average assets Residual income 3. Is Yokohama's greater amount of residual income an indication that it is better managed? O Yes No

Explanation / Answer

Margin = net operating income/sales turnover = sales/average operating assets ROI = margin *turnover Division Osaka yokohama sales 9,900,000 29,000,000 net operating income 792,000 2,900,000 average operating assets 2,475,000 14,500,000 margin 8.00% 10.00% turnover 4 2 1) ROI 32.00% 20.00% answer Residual income=net income-(average operating assets*min rate of return) 2) Osaka yokohama Average oprating assets 2,475,000 14,500,000 net operating income 792,000 2,900,000 minimum required return on average assets 17% 17% residual income 371250 435000 3) N0

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