CMA Intermediate · Management Accounting · Responsibility Accounting
Division R of Bharat Components has capital employed of ₹80,00,000 and a required return of 15%. Its residual income is ₹4,00,000. What is the division's ROI?
Operating profit equals residual income plus the capital charge: ₹4,00,000 plus 15% of ₹80,00,000 (₹12,00,000) gives ₹16,00,000. Dividing by ₹80,00,000 capital gives an ROI of 20%.
- A20%Correct
- B15%
- C5%
- D25%
Explanation
Capital charge = 15% × 80,00,000 = 12,00,000. Operating profit = RI + charge = 4,00,000 + 12,00,000 = 16,00,000. ROI = 16,00,000/80,00,000 = 20%. Check: 20% − 15% = 5% × 80,00,000 = 4,00,000. The 5% option is only the excess return, not the ROI.
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