Tan Corporation of Japan has two regional divisions with headquarters in Osaka and Yokohama. Selected data on the two divisions follow: Division OsakaYokohamaSales$9,700,000$27,000,000Net operating income$776,000$2,700,000Average operating assets$2,425,000$13,500,000 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 17%. Compute the residual income for each division.

ROI (Return on Investment) is used to measure the efficiency of the business investment by evaluating its performance.1.ROI = Profit Margin X Asset Turnover Return on Investment (ROI) = (Net Operating Income/Sales) x (Sales/Average Operating Assets) ROI Division Osaka = (776,000/9,700,000) x (9,700,000/2,425,000) = 32% ROI Division Yokohama =(2,700,000/27,000,000) x (27,000,000/13,500,000) =20%2. Residual Income = Net Operating Income - (Operating Assets*Cost of Capital) Residual Income Division Osaka = 776,000 -(2,425,000*17%) = 363,750 Residual Income Yokohama = 2,700,000-(13,500,000*17%) = 405,000

Answered: Tan Corporation of Japan has two…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Tan Corporation of Japan has two regional divisions with headquarters in Osaka and Yokohama. Selected data on the two divisions follow:

	Division
	Osaka	Yokohama
Sales	$	9,700,000	$	27,000,000
Net operating income	$	776,000	$	2,700,000
Average operating assets	$	2,425,000	$	13,500,000

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 17%. Compute the residual income for each division.

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