Exercise 126 Contrasting Return on Investment ROI and Residu

Exercise 12-6 Contrasting Return on Investment (ROI) and Residual Income [L012-1, LO12-2] Meiji Isetan Corp. of Japan has two regional divisions with headquarters in Osaka and Yokohama. Selected data on the two divisions follow: Division Osaka Yokohama Sales Net operating income Average operating assets $ 3,000,000 $ 9,000,000 $210,000 $ 720,000 $ 1,000,000 $4,000,000 Required 1. For each division, compute the return on investment (ROI) in terms of margin and turnover. (Do not round intermediate calculations.) 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 15%. Compute the residual income for each divisiorn Osaka Yokohama Average operating assets Net operating income Minimum required return Residual income

Solution

1) Calculate ROI :

2) Calculate residual income :

3) No

	Osaka	Yokohama
ROI	210000*100/1000000 = 21%	720000*100/4000000 = 18%