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Pro is a division of Mo and is an investment centre. The head office controls HR, finance and IT expenditure but all other costs are devolved to local centers. The statement of financial position for Pro shows net value of all assets and liabilities to be $4,500m at the start of the year and $4,890 at the end.
Revenue $3,500
Cost of sales $1,500
Local administration $250
IT costs $50
Distribution $80
Central Administration $30
Interest charges $90
Net profit $1,200The cost of capital is 12%.
Calculate the residual income.
The answer:
Profit $1,370
Imputed interest $(540)
RI $830The calculation for imputed interest is:
12% X $4,500 = $540.Why did they use the asset value at the start of the year?
There is no firm rule about whether to use end of year or start of year net assets – there is a logic for both.
In exam questions it is either made clear which to use, or there is only enough information for one alternative.
You have not said where you have found this question and so I cannot say more for this particular example.
If head office controls some items I should take everything except that to calculate residual income isn’t it.
But the answer sayas controllable profit is 1200+ 90+30+50
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