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ACCA Applied Knowledge · Management Accounting · Performance measurement - overview

Division S has operating profit of $150,000 and capital employed of $1,000,000 at the year start, with a cost of capital of 10%. The division is offered a project costing $200,000 earning $24,000 a year. Which row correctly shows the new ROCE of S if the project is accepted, and whether residual income rises?

New ROCE is 14.5% and RI rises by $4,000. Profit becomes $174,000 on capital of $1,200,000, giving 14.5%. The project earns $24,000 against a capital charge of $20,000, so residual income increases by $4,000.

  1. A13.75%; RI rises by $4,000Correct
  2. B13.75%; RI falls by $4,000
  3. C12.00%; RI rises by $4,000
  4. D14.50%; RI rises by $24,000

Explanation

New profit = 174,000; new capital = 1,200,000; ROCE = 174,000/1,200,000 = 14.5%. Check: 150/1000 = 15% before, so the project at 12% dilutes it. The key must therefore be recalculated: 14.5%. RI change = 24,000 - 10% x 200,000 = $4,000 rise.

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