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CMA Intermediate · Management Accounting · Divisional Performance Measurement

Division B of Kaveri Ltd earns operating profit of ₹30,00,000 on capital employed of ₹1,50,00,000. The company's required rate of return is 15%. What is the Residual Income (RI) of the division?

Residual income is ₹7,50,000. The capital charge is 15 percent of ₹1,50,00,000, which equals ₹22,50,000. Subtracting this from operating profit of ₹30,00,000 leaves ₹7,50,000 as the profit earned above the required return.

  1. A₹7,50,000Correct
  2. B₹22,50,000
  3. C₹5,00,000
  4. D₹10,00,000

Explanation

Imputed interest = 15% × 1,50,00,000 = 22,50,000. RI = 30,00,000 − 22,50,000 = 7,50,000. The option of ₹22,50,000 is the capital charge itself, not the residual after deducting it.

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