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

In an inter-firm comparison scheme, Firm Arjun reports sales of ₹40,00,000, cost of goods sold of ₹30,00,000 and capital employed of ₹25,00,000. The industry average ratios are: gross profit 20% of sales and sales to capital employed 1.8 times. Which statement is correct about Arjun?

Arjun's gross profit is ₹10,00,000, which is 25% of sales, above the industry's 20%. Capital turnover is 40,00,000 divided by 25,00,000, or 1.6 times, below the average 1.8 times. So margin is better but capital utilisation is weaker.

  1. AGross profit ratio 25%, capital turnover 1.6 times; margin above average, turnover below averageCorrect
  2. BGross profit ratio 20%, capital turnover 1.6 times; margin equal, turnover below average
  3. CGross profit ratio 25%, capital turnover 1.8 times; margin above average, turnover equal
  4. DGross profit ratio 33.3%, capital turnover 1.6 times; margin above average, turnover below average

Explanation

Gross profit = 40,00,000 - 30,00,000 = 10,00,000, which is 25% of sales. Capital turnover = 40,00,000/25,00,000 = 1.6 times. The 33.3% option wrongly uses cost as the base.

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