ExpertMedium2 marksShort Answer
ACCA · Question 31 · Performance measurement
A decentralized retail chain evaluates its division managers using Residual Income (RI).
Division A has an operating profit of $450,000 and net assets of $2,000,000. The company's imputed interest charge (cost of capital) is 12%.
Calculate the Residual Income for Division A. (Enter the number only)
A decentralized retail chain evaluates its division managers using Residual Income (RI).
Division A has an operating profit of $450,000 and net assets of $2,000,000. The company's imputed interest charge (cost of capital) is 12%.
Calculate the Residual Income for Division A. (Enter the number only)
How to approach this question
RI = Operating Profit - (Net Assets * Cost of Capital).
Full Answer
Imputed interest charge = 12% * $2,000,000 = $240,000.
Residual Income = $450,000 - $240,000 = $210,000.
Common mistakes
Calculating ROI (22.5%) instead of RI.
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