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CMA Intermediate · Management Accounting · Divisional Performance Measurement

A division has capital employed of ₹25,00,000 and ROI of 16%. Management wants ROI of 20% on the same capital employed through cost reduction alone. By how much must operating profit increase?

Operating profit must rise by ₹1,00,000. Current profit is 16 percent of ₹25,00,000, or ₹4,00,000, while the 20 percent target needs ₹5,00,000 on the same capital, so the required increase is the difference of ₹1,00,000.

  1. A₹4,00,000
  2. B₹1,00,000
  3. C₹5,00,000
  4. D₹80,000Correct

Explanation

Current profit = 16% × 25,00,000 = ₹4,00,000. Target profit = 20% × 25,00,000 = ₹5,00,000. Increase = ₹1,00,000. Hmm, check: 5,00,000 − 4,00,000 = 1,00,000, so the correct figure is ₹1,00,000.

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