Contrasting Return on Investment (ROI) and Residual Income [LO2, LO3]
Meiji Isetan Corp. of Japan has two regional divisions with headquarters in Osaka and Yokohama.Selected data on the two divisions follow (in millions of yen, denoted by ¥):
Division
Osaka Yokohama
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥3,000,000 ¥9,000,000
Net operating income . . . . . . . . . . . . . . . . . . . ¥210,000 ¥720,000
Average operating assets . . . . . . . . . . . . . . . . ¥1,000,000 ¥4,000,000
Required:
1. For each division, compute the return on investment (ROI) in terms of margin and turnover. Where necessary, carry computations to two decimal places.
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 division.
3. Is Yokohama's greater amount of residual income an indication that it is better managed?