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CMA Intermediate · Management Accounting · Divisional Performance Measurement

Division Q of Narmada Foods has capital employed of ₹60,00,000 and a target return of 12%. Its residual income is ₹3,60,000. What is its ROI?

ROI is 18%. The capital charge is 12% of ₹60,00,000, or ₹7,20,000. Adding the residual income of ₹3,60,000 gives divisional profit of ₹10,80,000, which divided by capital employed of ₹60,00,000 yields 18%.

  1. A18%Correct
  2. B12%
  3. C6%
  4. D7.2%

Explanation

Capital charge = 12% × 60,00,000 = ₹7,20,000. Profit = RI + charge = 3,60,000 + 7,20,000 = ₹10,80,000. ROI = 10,80,000/60,00,000 = 18%. Option 6% is the RI ratio, not ROI.

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