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CMA Intermediate · Management Accounting · Divisional Performance Measurement

Kaveri Textiles' Division P earns operating profit of ₹24,00,000 on capital employed of ₹1,00,00,000 (ROI 24%). Cost of capital is 16%. It can take a project needing ₹20,00,000 of extra capital that yields ₹4,00,000 profit (20%). Under the RI measure, what is the effect of accepting the project on divisional RI?

Divisional RI rises by ₹80,000. The project earns ₹4,00,000 against a capital charge of ₹3,20,000 (16% of ₹20,00,000). Because its 20% return exceeds the 16% cost of capital, RI favours acceptance even though ROI would fall.

  1. ARI falls by ₹80,000
  2. BRI rises by ₹80,000Correct
  3. CRI rises by ₹4,00,000
  4. DRI rises by ₹1,60,000

Explanation

Capital charge on the project = 16% × 20,00,000 = ₹3,20,000. Incremental RI = 4,00,000 − 3,20,000 = ₹80,000 increase. Under ROI the manager would reject it since 20% < 24%, but RI accepts it.

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