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ACCA Applied Knowledge · Management Accounting · Monitoring performance and reporting

Brecon Co's results: sales $1,200,000; operating profit $144,000; capital employed $960,000. Management plans to cut costs so operating profit margin rises to 15% with sales and capital employed unchanged. What will the new ROCE be?

The new ROCE will be 18.75%. A 15% margin on sales of $1,200,000 gives operating profit of $180,000, and dividing by unchanged capital employed of $960,000 gives 18.75%. The 15% option is the current ROCE, not the new one.

  1. A15.0%
  2. B18.75%Correct
  3. C12.0%
  4. D20.0%

Explanation

New operating profit = 15% x 1,200,000 = 180,000. ROCE = 180,000 / 960,000 = 18.75%. Choosing 15% confuses margin with ROCE; the current ROCE is 15% (144,000/960,000), so 15% is not the new figure.

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