CMA Final · Strategic Performance Management and Business Valuation · Performance Measurement, Evaluation and Improvement Tools
Sagar Textiles Ltd has a division with capital employed of ₹400 lakh and operating profit of ₹80 lakh. The company's cost of capital is 12%. What is the division's residual income?
Residual income is ₹32 lakh. The capital charge is 12% of ₹400 lakh, which is ₹48 lakh. Subtracting this from the operating profit of ₹80 lakh leaves ₹32 lakh of profit above the required return.
- A₹32 lakhCorrect
- B₹48 lakh
- C₹68 lakh
- D₹20 lakh
Explanation
Capital charge = 12% x 400 = ₹48 lakh. Residual income = 80 - 48 = ₹32 lakh. The figure of ₹48 lakh is only the capital charge, not the residual income, and ₹20 lakh results from using a 15% rate by mistake.
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