Exercise $10-6($Algo$)$ Contrasting Return on Investment $($ROI$)$ and Residual Income $[$LO$10-1,$ LO$10-2]$

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

Division

Osaka Yokohama

Sales $ $10,700,000$ $ $37,000,000$

Net operating income $ $749,000$ $ $3,330,000$

Average operating assets $ $2,675,000$ $ $18,500,000$

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 $16\%.$ Compute the residual income for each division.

$3.$ Is Yokohama$$s greater amount of residual income an indication that it is better managed?