--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 eachdivision.
3. Is Yokohama's greater amount of residual income an indication that it is better managed?
Explain.
--Computing and Interpreting Return on Investment (ROI) [LO2]
Selected operating data for two divisions of Outback Brewing, Ltd., of Australia are givenbelow (the currency is the Australian dollar, denoted here as $):
Division
New South
Queensland Wales
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,000,000 $7,000,000
Average operating assets . . . . . . . . . . . . . . . . $2,000,000 $2,000,000
Net operating income . . . . . . . . . . . . . . . . . . . $360,000 $420,000
Property, plant, and equipment (net) . . . . . . . . $950,000 $800,000
Required:
1. Compute the rate of return for each division using the return on investment (ROI) formula stated in terms of margin and turnover.
2. Which divisional manager seems to be doing the better job? Why?