ACCA Applied Knowledge · Management Accounting · Monitoring performance and reporting
Dunmore Co has sales of $2,400,000, operating profit of $288,000, and capital employed of $1,600,000. Management plans to cut operating costs so that profit margin rises by 2 percentage points with sales and capital employed unchanged. What will the new ROCE be?
The new ROCE will be 21%. The current margin is 12%, rising to 14% on unchanged sales of $2,400,000, giving profit of $336,000. Dividing by capital employed of $1,600,000 yields 21%. The current ROCE is only 18%.
- A12.0%
- B18.0%
- C21.0%Correct
- D30.0%
Explanation
Current margin = 288,000 / 2,400,000 = 12%. New margin = 14%, so profit = 336,000. ROCE = 336,000 / 1,600,000 = 21%. Current ROCE is 18%, and 30% results from wrongly adding 2 points to asset turnover logic.
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