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(SPORT CO)
C E
$’000 $’000
Controllable profit 2,124·5 4,788
Less: imputed charge on assets at 12% (1,320) (3,240) ––––––– ––––––
Residual income 804·5 1,548 ––––––– ––––––From the residual income results, it can clearly be seen that both divisions have performed well, with healthy RI figures of between $0·8m and $1·55m. The cost of capital of Sports Co is significantly lower than the target return on investment which the company seeks, making the residual income figure show a more positive position.
How to calculate the imputed charge on assets at 12%?
The question says that they are using the average divisional net assets.
The average controllable net assets for C are (13,000 + 9,000) / 2 = 11,000.
12% x 11,000 = 1,320.The average controllable net assets for E are (24,000 + 30,000) / 2 = 27,000.
12% x 27,000 = 3,240.
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