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Management Accounting · Divisional Performance Measurement

Return on Investment (ROI) for Divisional Performance Measurement

Updated 10 October 2026 · Fact-checked

Return on Investment (ROI) measures how much profit a division earns on the capital invested in it. ROI = Divisional profit ÷ Capital employed × 100. To solve a question, fix the profit figure, fix the investment base, divide, then split into margin and turnover if asked, and compare with the required return.

Understand Return on Investment (ROI)

A company gives each division its own capital. The head office then needs one number to judge whether that capital is used well. Profit alone cannot do this. A division earning ₹10 lakh on ₹50 lakh of capital is far better than one earning ₹10 lakh on ₹2 crore.

Return on Investment (ROI) fixes this by expressing profit as a percentage of the capital invested. It is used for an investment centre, where the manager controls revenue, costs and also investment decisions. A higher ROI means better use of capital.

ROI can be split into two parts, known as the DuPont breakdown. Profit margin shows how much profit is earned on each rupee of sales. Capital turnover (also called investment turnover) shows how many rupees of sales are produced by each rupee of capital. ROI = Margin × Turnover. This tells a manager where to act: raise margin by controlling costs and prices, or raise turnover by using assets more intensively.

ROI is simple, widely understood and links to the company's overall return. But it has a serious weakness. A manager is judged on a percentage, not on the absolute profit. So a manager with a high ROI may reject a project that earns more than the company's cost of capital but less than the division's current ROI. This is a dysfunctional decision: good for the division's figure, bad for the company.

The definitions of profit and capital also matter. Profit may be before or after interest and tax. Capital employed may use opening, closing or average values, and assets may be taken at book value or replacement cost. Always state the basis you use.

Key rules to remember

Return on Investment
ROI = (Divisional profit ÷ Capital employed) × 100
Use the profit and capital definition given in the question. If none is given, state your assumption.
Profit margin
Profit margin = (Divisional profit ÷ Sales) × 100
Uses the same profit figure as in ROI.
Capital turnover
Capital turnover = Sales ÷ Capital employed
Expressed in times. Uses the same capital figure as in ROI.
DuPont breakdown
ROI = Profit margin × Capital turnover = (Profit ÷ Sales) × (Sales ÷ Capital employed)
Sales cancels out. Use it to check your answer.
Capital employed (asset approach)
Capital employed = Fixed assets + Current assets − Current liabilities
Equals net assets. Check whether the question wants total assets instead.
Average capital employed
Average capital employed = (Opening + Closing) ÷ 2
Use only if the question asks for it or gives both figures.

How to solve Return on Investment (ROI) questions

Follow this order for any ROI question. It keeps the profit and capital definitions consistent and earns step marks.

  1. 1Read the question and note the profit measure and capital measure to use, for example profit before interest and tax, and average or closing capital.
  2. 2Compute divisional profit from the data given. Deduct only the costs the question treats as relevant for the division.
  3. 3Compute capital employed. Add fixed assets and net current assets, or use the figure given. Take the average if asked.
  4. 4Calculate ROI = profit ÷ capital employed × 100 and show the substitution.
  5. 5If asked, calculate profit margin and capital turnover and show that margin × turnover equals ROI.
  6. 6Compare ROI with the target or required return, or with other divisions, and state which division performs better.
  7. 7If a new project is proposed, compute the new ROI and the project's own return, then state whether the manager would accept it and whether the company should.
  8. 8Write a one-line conclusion with any limitation that affects the decision.

Quickest way: Margin-turnover shortcut

When to use it: Use when the question gives sales, profit and capital for several divisions, or asks how ROI changes if margin or turnover changes.

  1. Compute margin = profit ÷ sales and turnover = sales ÷ capital for each division.
  2. Multiply them to get ROI. This is a built-in check on your arithmetic.
  3. To test a change, adjust only the changed item. If sales rise with the same margin and capital, ROI rises by the same proportion as turnover.
  4. For a new project, compare its return with the target return, not only with the division's current ROI.

Common mistakes in Return on Investment (ROI)

  • Using different profit or capital definitions in margin, turnover and ROI.

    Students pick figures separately for each ratio.

    Fix: Decide profit and capital once at the start and use them in all three ratios. Margin × turnover must equal ROI.

  • Forgetting to deduct current liabilities when finding capital employed.

    Students add all assets by habit.

    Fix: Read the question for the capital definition. If capital employed means net assets, use fixed assets plus current assets minus current liabilities.

  • Using closing capital when average capital is asked, or the reverse.

    Both figures appear in the data and students grab the nearest one.

    Fix: Underline the word average or closing in the question and follow it.

  • Accepting a project simply because its return is above the division's current ROI.

    Students compare the wrong pair of numbers.

    Fix: For the manager's view compare the project return with current ROI. For the company's view compare with the cost of capital or required return. Show both.

  • Writing ROI as a decimal or without the percentage sign.

    Rushing through division.

    Fix: Multiply by 100 and write the % sign. Write turnover in times.

  • Listing limitations without linking them to dysfunctional decisions.

    Students memorise a generic list.

    Fix: Always give the example of a manager rejecting a project that earns more than the cost of capital but less than current ROI.

Worked examples

Example 1

Division Alpha of Sundaram Industries Ltd has sales of ₹40,00,000 and divisional profit of ₹6,00,000. Its capital employed is ₹30,00,000. Calculate profit margin, capital turnover and ROI, and verify the DuPont relationship.

Show the solution
  1. Profit margin = 6,00,000 ÷ 40,00,000 × 100 = 15%.
  2. Capital turnover = 40,00,000 ÷ 30,00,000 = 1.333 times (4/3).
  3. ROI = 6,00,000 ÷ 30,00,000 × 100 = 20%.
  4. Check: margin × turnover = 15% × 4/3 = 20%. This agrees with the direct calculation.

Answer: Profit margin is 15%, capital turnover is 1.33 times and ROI is 20%.

Example 2

Division Beta of Kaveri Ltd has capital employed of ₹50,00,000 and earns a profit of ₹10,00,000. The company's required return is 15%. The divisional manager is offered a project needing ₹10,00,000 that will earn a profit of ₹1,80,000 a year. Calculate the division's current ROI, the ROI after the project, and state whether the manager and the company would accept it.

Show the solution
  1. Current ROI = 10,00,000 ÷ 50,00,000 × 100 = 20%.
  2. Project return = 1,80,000 ÷ 10,00,000 × 100 = 18%.
  3. ROI after project: profit = 10,00,000 + 1,80,000 = ₹11,80,000. Capital = 50,00,000 + 10,00,000 = ₹60,00,000.
  4. New ROI = 11,80,000 ÷ 60,00,000 × 100 = 19.67%.
  5. Manager's view: ROI falls from 20% to 19.67%, so the manager is likely to reject the project.
  6. Company's view: the project return of 18% is above the required return of 15%, so the company should accept it.
  7. Conclusion: ROI as the only measure leads to a dysfunctional decision here.

Answer: Current ROI is 20% and ROI after the project is 19.67%. The manager would reject it, but the company should accept it because 18% exceeds the 15% required return.

Exam tips

  • Quote the formula first, then substitute. Even if arithmetic slips, you still earn method marks.
  • In MCQs, check which profit and which capital base the options assume. Wrong options often come from using the other base.
  • For theory questions on limitations, always include the dysfunctional decision example with numbers if you can.
  • When asked to compare divisions, give the ranking and one reason using margin or turnover, not only ROI.
  • If the question mentions a required return, residual income is probably the follow-up. Link your answer to it briefly.

Practice questions from Divisional Performance Measurement

Return on Investment (ROI) in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Return on Investment (ROI): frequently asked questions

What is the formula for ROI of a division?

ROI = Divisional profit ÷ Capital employed × 100. Use the profit and capital definitions given in the question. If none are given, state your assumption clearly.

What is the DuPont breakdown of ROI?

It splits ROI into profit margin and capital turnover. ROI = (Profit ÷ Sales) × (Sales ÷ Capital employed). It shows whether a division should improve margins or use its assets more efficiently.

Why can ROI lead to wrong decisions?

Managers are judged on a percentage. A manager with a high ROI may reject a project that earns more than the company's required return but less than the current ROI. This helps the division's figure but hurts the company.

Should I use average or closing capital employed?

Follow the question. Average capital employed is usually preferred as profit is earned over the year, but use closing capital if the question says so or gives only that figure.