CMA Intermediate · Management Accounting · Divisional Performance Measurement
Two divisions of Sutlej Ltd have the same cost of capital of 10%. Division P has NOPAT ₹30 lakh on capital of ₹200 lakh. Division Q has NOPAT ₹14 lakh on capital of ₹100 lakh. Which statement is correct?
Division P's capital charge is ₹20 lakh, giving EVA of ₹10 lakh. Division Q's charge is ₹10 lakh, giving EVA of ₹4 lakh. So P creates more economic value, and it also has the higher return on capital at 15% against 14%.
- AP has higher EVA (₹10 lakh) than Q (₹4 lakh)Correct
- BQ has higher EVA than P because its return on capital is higher
- CBoth have equal EVA of ₹10 lakh
- DP has EVA of ₹30 lakh and Q has ₹14 lakh
Explanation
P: charge = 10% x 200 = 20; EVA = 30 - 20 = ₹10 lakh. Q: charge = 10; EVA = 14 - 10 = ₹4 lakh. Q has higher return on capital (14% vs 15%? P's is 15%, Q's 14%), so P is better on both measures.
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