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EXERCISE 11-6 Contrasting Return on Investment (ROI) and Residual Income (L011-1, L011-2] 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 ......... $3,000,000 $210,000 $1,000,000 Yokohama $9,000,000 $720,000 $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 mini- mum 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? Explain.

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


Division
Osaka Yokohama
Sales $ 10,100,000 $ 31,000,000
Net operatingincome $ 808,000 $ 3,100,000
Average operatingassets $ 2,525,000 $ 15,500,000


Required:
1.

For each division, compute the return on investment (ROI) interms of margin and turnover. (Do not round intermediatecalculations. Enter your answers as a percent (i.e., 0.12 should beentered as 12).)
Osaka Yokohama
ROI % %

2.

Assume that the company evaluates performance using residualincome and that the minimum required rate of return for anydivision is 17%. Compute the residual income for each division.

Osaka Yokohama
Average operating assets
Net operating income
Minimum required return onaverage assets
Residual income
3. Is Yokohama’s greater amount ofresidual income an indication that it is better managed?
Yes
No

EXERCISE 11-12 Evaluating New Investments Using Return on Investment (ROI) and Residual Income [L011-1, L011-2] Selected sales and operating data for three divisions of different structural engineering firms are given as follows: Sales ........... Average operating assets ............. Net operating income ................ Minimum required rate of return ........ Division A $12,000,000 $3,000,000 $600,000 14% Division B $14,000,000 $7,000,000 $560,000 10% Division C $25,000,000 $5,000,000 $800,000 16% 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 for each division. 3. Assume that each division is presented with an investment opportunity that would yield a 15% rate of return. a. If performance is being measured by ROI, which division or divisions will probably accept the opportunity? Reject? Why? b. If performance is being measured by residual income, which division or divisions will probably accept the opportunity? Reject? Why?

PROBLEM 11-18 Return on Investment (ROI) and Residual Income (L011-1, L011-2) "I know headquarters wants us to add that new product line," said Dell Havasi, manager of Billings Company's Office Products Division. "But I want to see the numbers before I make any division's return on investment (ROI) has led the company for three years, and I don't want any letdown." Billings Company is a decentralized wholesaler with five autonomous divisions. The divi- sions are evaluated on the basis of ROI, with year-end bonuses given to the divisional managers who have the highest ROls. Operating results for the company's Office Products Division for the most recent year are given below: S ales ......................... Variable expenses .............. Contribution margin ............ Fixed expenses .................. Net operating income ........... Divisional operating assets ........... $10,000,000 6,000,000 4,000,000 3,200,000 $ 800,000 $ 4,000,000 The company had an overall return on investment (ROI) of 15% last year (considering all divisions). The Office Products Division has an opportunity to add a new product line that would require an additional investment in operating assets of $1,000,000. The cost and revenue character istics of the new product line per year would be: Sales ....................... Variable expenses ............. Fixed expenses ............... $2,000,000 60% of sales $640,000 Required: 1. Compute the Office Products Division's ROI for the most recent year; also compute the ROI as it would appear if the new product line is added. 2. If you were in Dell Havasi's position, would you accept or reject the new product line? Explain. 3. Why do you suppose headquarters is anxious for the Office Products Division to add the new product line? 4. Suppose that the company's minimum required rate of return on operating assets is 12% and that performance is evaluated using residual income. a Compute the Office Products Division's residual income for the most recent year, also compute the residual income as it would appear if the new product line is added. s, if you were in Dell Havasi's position, would you ac reject the new product line? Explain.

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