ACCA Strategic Professional · Advanced Performance Management · Financial performance measurement
Zelda Division of Orbis Group has operating profit of $1,800,000 and capital employed of $9,000,000. Orbis Group's cost of capital is 12%. What is the division's residual income?
Residual income is $720,000. It is operating profit of $1,800,000 less a capital charge of 12% on $9,000,000 capital employed, which is $1,080,000. The division earns more than the required return, so residual income is positive.
- A$720,000Correct
- B$1,080,000
- C$1,800,000
- D$720,000 negative
Explanation
Imputed interest = 12% x 9,000,000 = 1,080,000. Residual income = 1,800,000 - 1,080,000 = 720,000. The figure of 1,080,000 is only the capital charge, not the residual income. Check: 720,000 + 1,080,000 = 1,800,000.
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