Skip to content

CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Strategic Cost & Performance Management

Case: Sundaram Auto Components Ltd has operating profit of Rs 90 lakh before interest. Capital employed is Rs 600 lakh. The cost of capital is 12%. Tax is ignored and the divisional manager's controllable investment equals the capital employed. The board evaluates the division on Residual Income. What is the Residual Income?

Residual Income is Rs 18 lakh. Operating profit of Rs 90 lakh less a capital charge of 12% on Rs 600 lakh, which is Rs 72 lakh, leaves Rs 18 lakh. This measures profit earned above the minimum required return.

  1. ARs 18 lakhCorrect
  2. BRs 72 lakh
  3. CRs 15 lakh
  4. DRs 162 lakh

Explanation

Capital charge = 12% x 600 = Rs 72 lakh. Residual Income = 90 - 72 = Rs 18 lakh. Rs 72 lakh is just the capital charge; Rs 15 lakh is ROI (15%) mistaken as an amount.

Did you get it right without looking?

One question tells you little. A timed set on Strategic Cost & Performance Management shows your real accuracy, how long you take and where you lose marks.

Practise Strategic Cost & Performance ManagementFree diagnostic mock

More Strategic Cost & Performance Management questions