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ACCA Applied Skills · Performance Management · Divisional performance and transfer pricing

Division Gamma has capital employed of $1,200,000 and divisional profit of $216,000. The group requires a return of 14%. Which is the residual income of Gamma?

Residual income is divisional profit less a capital charge. The charge is 14% of $1,200,000, which is $168,000. Subtracting this from profit of $216,000 gives residual income of $48,000.

  1. A$48,000Correct
  2. B$168,000
  3. C$18,000
  4. D$216,000

Explanation

Capital charge = 14% x 1,200,000 = 168,000. Residual income = 216,000 - 168,000 = $48,000. The $168,000 option is the capital charge only; $18,000 results from using ROI of 18% minus 0 incorrectly as a dollar amount.

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