Page 426 - F2 - MA Integrated Workbook STUDENT 2018-19

Chapter 16

Residual Income (RI) = Controllable Profit – Notional interest on capital

RI resolves the dysfunctional aspect of RI does not facilitate comparisons
the ROI measure. between divisions.

RI reduces ROCE's problem of rejecting RI does not relate the size of a division's
projects with a ROCE in excess of the profit to the assets employed in order to
company’s target, but lower than the obtain that profit.
division’ current ROCE.

The cost of financing a division is brought RI can also mislead, as it increases over
home to divisional managers. time.

Test your understanding 6

An organisation is divided into a number of divisions, each of which operates
as a profit centre. Which of the following would be useful measures to monitor
divisional performance?

(i) Contribution

(ii) Controllable profit

(iii) Return on investment

(iv) Residual income

A (i) only

B (i) and (ii) only

C (iii), (iv) only

D All of them

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