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ACCA Strategic Professional · Advanced Performance Management · Financial performance measurement

Delta Division has controllable operating profit of $900,000 and divisional net assets of $5,000,000. The group cost of capital is 10%. What is Delta's residual income, and its ROI?

Residual income is $400,000 and ROI is 18%. The capital charge is 10% of $5m, or $500,000, deducted from $900,000 profit. ROI is profit divided by net assets, $900,000 over $5,000,000, giving 18%.

  1. AResidual income $400,000; ROI 18%Correct
  2. BResidual income $400,000; ROI 10%
  3. CResidual income $450,000; ROI 18%
  4. DResidual income $900,000; ROI 18%

Explanation

Capital charge = 10% x $5,000,000 = $500,000. Residual income = $900,000 - $500,000 = $400,000. ROI = 900,000 / 5,000,000 = 18%. Option C wrongly uses a charge of $450,000, and option D ignores the capital charge.

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