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CMA Intermediate · Management Accounting · Divisional Performance Measurement

Ramesh Pharma's Division P has operating profit of ₹36 lakh and capital employed of ₹200 lakh. Cost of capital is 12%. Division P is also evaluated on a balanced scorecard. Which statement about Division P's financial perspective result is correct?

ROCE is 18% (36 divided by 200) and residual income is ₹12 lakh, being operating profit of ₹36 lakh less a capital charge of ₹24 lakh (12% of ₹200 lakh). Quoting ₹24 lakh confuses the capital charge with residual income.

  1. AROCE is 18% and residual income is ₹12 lakhCorrect
  2. BROCE is 18% and residual income is ₹24 lakh
  3. CROCE is 12% and residual income is ₹12 lakh
  4. DROCE is 18% and residual income is ₹36 lakh

Explanation

ROCE = 36/200 = 18%. Capital charge = 12% of 200 = ₹24 lakh. Residual income = 36 - 24 = ₹12 lakh. The ₹24 lakh option reports the capital charge as RI; ₹36 lakh ignores the capital charge.

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