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CMA Final · Strategic Cost Management · Uniform Costing and Inter-firm Comparison

Four firms in an inter-firm comparison scheme report return on capital employed (ROCE) of 12%, 15%, 18% and 15%. Firm X has a profit margin of 6% on sales and capital turnover of 2.5 times. Compared with the simple average ROCE of the four reporting firms, Firm X's ROCE is:

The average ROCE of the four firms is 15%. Firm X's ROCE equals profit margin times capital turnover, 6% multiplied by 2.5, which is also 15%. Therefore Firm X is exactly equal to the average of the reporting firms.

  1. ALower by 1.5 percentage points
  2. BEqual to the averageCorrect
  3. CHigher by 1.5 percentage points
  4. DLower by 3 percentage points

Explanation

Average ROCE = (12+15+18+15)/4 = 15%. Firm X ROCE = margin x turnover = 6% x 2.5 = 15%. So X equals the average; the other options use wrong arithmetic.

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