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CMA Final · Strategic Performance Management and Business Valuation · Performance Measurement, Evaluation and Improvement Tools

Mehta Auto Components Ltd has a division with sales of ₹800 lakh, operating profit of ₹96 lakh and average investment of ₹480 lakh. What are the division's profit margin and investment turnover, which together give its ROI?

The profit margin is 12% and investment turnover is about 1.67 times, giving an ROI of 20%. Margin is operating profit divided by sales, turnover is sales divided by investment, and their product equals profit divided by investment, which is ₹96 lakh over ₹480 lakh.

  1. AMargin 12%, turnover 1.67 times, ROI 20%Correct
  2. BMargin 20%, turnover 0.6 times, ROI 12%
  3. CMargin 12%, turnover 0.6 times, ROI 7.2%
  4. DMargin 12%, turnover 1.67 times, ROI 12%

Explanation

Margin = 96/800 = 12%. Investment turnover = 800/480 = 1.67 times. ROI = 12% × 1.67 = 20%, which also equals 96/480 = 20%. The option showing turnover of 0.6 times inverts the ratio by dividing investment by sales.

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