Reference no: EM132204979

Questions -

Q1. Meiji Isetan Corp. of Japan has two regional divisions with headquarters in Osaka and Yokohama. Selected data on the two divisions follow:

Osaka Yokohama

Sales $9,100,000 $21,000,000

Net operating income $455,000 $1,470,000

Average operating assets $2,275,000 $10,500,000

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?

Q2. Selected sales and operating data for three divisions of different structural engineering firms are given as follows:

Division A Division B Division C

Sales $5,000,000 $9,000,000 $8,100,000

Average operating assets $1,000,000 $4,500,000 $1,620,000

Net operating income $205,000 $729,000 $109,350

Minimum required rate of return 16.00% 16.20% 13.00%

Required:

1. Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover.

2. Compute the residual income (loss) for each division.

Q3. Assume that each division is presented with an investment opportunity that would yield a 16% rate of return.

a. If performance is being measured by ROI, which division or divisions will probably accept or reject the opportunity?

b. If performance is being measured by residual income, which division or divisions will probably accept or reject the opportunity?