ACCA Applied Skills · Performance Management · Divisional performance and transfer pricing
Division A of Zenith Co earned a divisional profit of $180,000 on capital employed of $900,000. Zenith's cost of capital is 15%. What is the division's residual income (RI)?
Residual income is $45,000. It equals divisional profit of $180,000 less a capital charge of 15% on $900,000 capital employed, which is $135,000. The charge must be deducted from profit to find the surplus earned above the required return.
- A$45,000Correct
- B$135,000
- C$20,000
- D$180,000
Explanation
Imputed interest = 15% x $900,000 = $135,000. RI = $180,000 - $135,000 = $45,000. The $135,000 option is the interest charge itself, not the RI.
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