CMA Final · Strategic Performance Management and Business Valuation · Performance Measurement, Evaluation and Improvement Tools
Sagar Textiles Ltd has a division with operating profit of ₹90 lakh and average capital employed of ₹600 lakh. The company's required rate of return is 12%. What is the division's residual income?
Residual income is operating profit less a capital charge on capital employed. The charge is 12% of ₹600 lakh, which is ₹72 lakh. Subtracting this from ₹90 lakh profit leaves a residual income of ₹18 lakh.
- A₹18 lakhCorrect
- B₹72 lakh
- C₹90 lakh
- D₹15 lakh
Explanation
Residual income = operating profit minus the capital charge. Capital charge = 12% x 600 = ₹72 lakh. RI = 90 - 72 = ₹18 lakh. The figure of ₹72 lakh is the capital charge itself, not the residual income.
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