ACCA Strategic Professional · Advanced Performance Management · Financial performance measurement
Division Alpha of Brightwell Group earns operating profit of $360,000 on divisional capital employed of $2,400,000. Brightwell's cost of capital is 11%. What is Alpha's residual income?
Residual income is $96,000. It is divisional profit of $360,000 less a capital charge of $264,000, being $2,400,000 of capital employed multiplied by the 11% cost of capital. Positive residual income shows the division earns more than the required return.
- A$96,000Correct
- B$264,000
- C$360,000
- D$15,000
Explanation
Residual income = profit - (capital employed x cost of capital) = 360,000 - (2,400,000 x 11% = 264,000) = $96,000. The $264,000 option is just the capital charge, not the residual income. ROI is 15%, which exceeds the 11% charge, consistent with positive RI.
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