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ACCA Applied Knowledge · Financial Accounting · Ratios

Brava Co has revenue of $2,000,000 and operating profit of $200,000. Capital employed is $1,000,000. Management plans to cut operating costs so that operating profit margin rises to 12% with revenue and capital employed unchanged. Separately, an asset revaluation increases capital employed by $250,000 with profit unchanged at the original level. Which statement about ROCE is correct?

Cost cuts lift ROCE from 20% to 24%, while the revaluation alone cuts it to 16%. Original ROCE is $200,000 over $1m. A 12% margin gives $240,000 profit, so 24%. Revaluation raises capital employed to $1.25m with profit unchanged, giving 16%.

  1. ACost cuts raise ROCE from 20% to 24%; the revaluation alone reduces ROCE to 16%Correct
  2. BCost cuts raise ROCE from 20% to 12%; the revaluation alone reduces ROCE to 16%
  3. CCost cuts raise ROCE from 20% to 24%; the revaluation alone reduces ROCE to 20%
  4. DCost cuts raise ROCE from 10% to 12%; the revaluation alone reduces ROCE to 8%

Explanation

Original ROCE = 200,000/1,000,000 = 20% (margin 10% x turnover 2). With 12% margin, profit = 240,000, ROCE = 24%. Revaluation: 200,000/1,250,000 = 16%. The 12% option confuses margin with ROCE.

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