EXERCISE 12-14 (20 MINUTES)

3. No, the Yokohama Division is simply larger than the Osaka Division and

for this reason one would expect that it would have a greater amount of

residual income. Residual income can’t be used to compare the per-

formance of divisions of different sizes. Larger divisions will almost al-

ways look better, not necessarily because of better management but

simply because they are larger. In fact, in the case above, the Yokohama

Division does not appear to be as well managed as the Osaka Division.

Note from Part (1) that Yokohama has only an 18% ROI as compared to

21% for Osaka.