ExpertMedium2 marksShort Answer
ACCA · Question 31 · Performance Measurement
A division of a multinational corporation has controllable profit of $250,000 and net assets of $1,500,000. The company's cost of capital is 12%.
Calculate the division's Residual Income (RI). (Enter numbers only)
A division of a multinational corporation has controllable profit of $250,000 and net assets of $1,500,000. The company's cost of capital is 12%.
Calculate the division's Residual Income (RI). (Enter numbers only)
How to approach this question
1. Calculate the imputed interest charge (Net Assets * Cost of Capital). 2. Subtract the imputed interest from the controllable profit.
Full Answer
Imputed interest charge = 12% × $1,500,000 = $180,000.
Residual Income = Controllable Profit - Imputed Interest
RI = $250,000 - $180,000 = $70,000.
Common mistakes
Calculating Return on Investment (ROI) instead of Residual Income.
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