Return on investment : The Return on Investment is also called ROI. The return means the profit you make as a result of your investments. Return on Investment is a performance measure used to evaluate the profitability or efficiency of an investments or compare the efficiency of a number of investments. ROI is generally defined as the ratio of net profit over the total cost of the investment. ROI is calculated by dividing the net income by the total cost of the investment. Residual income: Residual income means the income or money that continues to flow after an initial investment of time and resources has been completed. It is the net operational income that an investment center generates above the minimum needed return on its operating assets. Residual income is often referred to as a passive income. To compute: The margin, turnover and return on investment for each division.

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Chapter 11, Problem 6E

1

To determine

Concept introduction:

Return on investment:

The Return on Investment is also called ROI. The return means the profit you make as a result of your investments. Return on Investment is a performance measure used to evaluate the profitability or efficiency of an investments or compare the efficiency of a number of investments. ROI is generally defined as the ratio of net profit over the total cost of the investment. ROI is calculated by dividing the net income by the total cost of the investment.

Residual income:

Residual income means the income or money that continues to flow after an initial investment of time and resources has been completed. It is the net operational income that an investment center generates above the minimum needed return on its operating assets. Residual income is often referred to as a passive income.

To compute:

The margin, turnover and return on investment for each division.

2

To determine

Concept introduction:

Return on investment:

The Return on Investment is also called ROI. The return means the profit you make as a result of your investments. Return on Investment is a performance measure used to evaluate the profitability or efficiency of an investments or compare the efficiency of a number of investments. ROI is generally defined as the ratio of net profit over the total cost of the investment. ROI is calculated by dividing the net income by the total cost of the investment.

Residual income:

Residual income means the income or money that continues to flow after an initial investment of time and resources has been completed. It is the net operational income that an investment center generates above the minimum needed return on its operating assets. Residual income is often referred to as a passive income.

To compute:

The residual income for each division.

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Contrasting Return on Investment (ROI) and Residual Income Meiji Isetan Corp. of Japan has two regional divisions with headquarters in Osaka and Yokohama. Selected data on the two divisions follow: 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? Explain.

Subject: acounting