ExpertMedium2 marksMultiple Choice
ACCA · Question 29 · Performance Measurement
Section A
CloudScale Tech is evaluating a new division. The division has a controllable profit of $400,000 and net assets of $2,000,000. The company's cost of capital is 12%. What is the Residual Income (RI) for the division?
Section A
CloudScale Tech is evaluating a new division. The division has a controllable profit of $400,000 and net assets of $2,000,000. The company's cost of capital is 12%. What is the Residual Income (RI) for the division?
Answer options:
A.
$240,000
B.
$160,000
C.
20%
D.
$640,000
How to approach this question
Calculate the imputed interest charge (Net Assets * Cost of Capital). Subtract this charge from the controllable profit.
Full Answer
B.$160,000✓ Correct
Residual Income (RI) = Profit - Imputed Interest. Imputed Interest = 12% * $2,000,000 = $240,000. RI = $400,000 - $240,000 = $160,000. RI is an absolute measure of performance, unlike ROI which is a percentage.
Common mistakes
Calculating ROI (20%) instead of RI, or selecting the imputed interest amount ($240,000).
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