CMA Intermediate · Management Accounting · Divisional Performance Measurement
Division D of Himalaya Components has sales of ₹2,40,00,000, operating profit margin of 10% and capital employed of ₹1,20,00,000. Management wants ROI of 30% on the same capital and sales. By how many rupees must operating profit increase, with capital employed unchanged, to reach this ROI?
Operating profit must rise by ₹12,00,000. Current profit is 10 percent of ₹2,40,00,000, or ₹24,00,000. A 30 percent ROI on capital of ₹1,20,00,000 requires ₹36,00,000. The difference between target and current profit is ₹12,00,000.
- A₹6,00,000
- B₹24,00,000
- C₹12,00,000Correct
- D₹36,00,000
Explanation
Current profit = 10% × 2,40,00,000 = 24,00,000; current ROI = 20% (profit margin 10% × capital turnover 2). Target profit = 30% × 1,20,00,000 = 36,00,000. Increase = 36,00,000 − 24,00,000 = ₹12,00,000. ₹36,00,000 is the target profit, not the increase.
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