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CMA Intermediate · Management Accounting · Responsibility Accounting

Division R of Taranga Ltd has operating profit of Rs 30,00,000 and capital employed of Rs 1,50,00,000. Cost of capital is 12%. Management considers a new project needing Rs 40,00,000 investment yielding Rs 6,00,000 annual profit. What are the divisional ROI and RI after accepting the project?

After the project, ROI is about 18.95 percent and RI is Rs 13,20,000. Profit becomes Rs 36,00,000 on capital of Rs 1,90,00,000. The capital charge at 12 percent is Rs 22,80,000, leaving residual income of Rs 13,20,000.

  1. AROI 18.95%; RI Rs 13,20,000Correct
  2. BROI 20%; RI Rs 12,00,000
  3. CROI 18.95%; RI Rs 12,00,000
  4. DROI 19.00%; RI Rs 13,20,000

Explanation

New profit = 36,00,000; new capital = 1,90,00,000. ROI = 36/190 = 18.947%, about 18.95%. Capital charge = 12% x 1,90,00,000 = 22,80,000, so RI = 36,00,000 - 22,80,000 = Rs 13,20,000. Rs 12,00,000 is the pre-project RI (30,00,000 - 18,00,000), not the post-project one.

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