CMA Intermediate · Management Accounting · Responsibility Accounting
Meghna Ltd's Division P earns operating profit of Rs 24,00,000 on capital employed of Rs 120,00,000. The company's cost of capital is 15%. What is the Residual Income (RI) of Division P?
Residual income is Rs 6,00,000. The capital charge is 15 percent of Rs 1,20,00,000, which is Rs 18,00,000. Subtracting this charge from the divisional operating profit of Rs 24,00,000 leaves Rs 6,00,000 as profit earned above the required return.
- ARs 6,00,000Correct
- BRs 18,00,000
- CRs 4,50,000
- DRs 3,00,000
Explanation
Capital charge = 15% x 1,20,00,000 = Rs 18,00,000. RI = 24,00,000 - 18,00,000 = Rs 6,00,000. Rs 18,00,000 is only the capital charge, and Rs 3,00,000 wrongly uses 20% ROI minus 15%... applied to a wrong base.
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