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CMA Intermediate · Management Accounting · Divisional Performance Measurement

Division E of Godavari Textiles has operating profit of ₹14,00,000. Its capital employed is ₹60,00,000 at the start of the year and ₹80,00,000 at the end. If ROI is computed on average capital employed, what is the ROI?

ROI is 20 percent. Average capital employed is the mean of ₹60,00,000 and ₹80,00,000, which is ₹70,00,000. Dividing operating profit of ₹14,00,000 by this average gives 0.20. Using only opening or closing capital would use the wrong base.

  1. A23.33%
  2. B17.50%
  3. C20.00%Correct
  4. D14.00%

Explanation

Average capital = (60,00,000 + 80,00,000)/2 = 70,00,000. ROI = 14,00,000 / 70,00,000 = 20%. Using opening capital gives 23.33% and closing capital gives 17.5%, both wrong bases.

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