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Decision making costing


Sudhanshu (Assistant Manager at Union Bank of India)     04 June 2020

Sudhanshu
Assistant Manager at Union Bank of India 
 1 likes  36 points

| My Other Post

You are a consultant hired to advise ABC Limited on ROI and help with decision making
for additional order. The company has provided you following information:

Particulars Amount (Rs.)
Sales (2,00,000 units at Rs. 20) 4,000,000
Less: Variable costs @ Rs. 15 per unit 3,000,000
Contribution Margin 1,000,000
Less: Fixed costs 750,000
Division Profit 250,000

The amount of division investment is Rs. 15,00,000 and the target rate of return on
investment is 20%

a. Based on the information provided calculate ROI and Residual income of ABC Limited 
b. Assume that division has offer to sell 50,000 units at Rs. 25 per unit. If additional order is accepted, the variable cost per unit will remain the same. However, fixed costs would increase by Rs. 250,000. A further additional investment of Rs. 10,00,000 would also be required. Analyze the impact on residual income.

avater

yasaswi gomes   04 June 2020

yasaswi gomes

 61 likes  986 points

View Profile | My Other Post

Scenario 1 ROI= 250,000/1500000= 16.7%

Scenario 2 ROI= 1250000/2500000= 50%

Workings: Sales=1250000

Profit= (1250000+4000000)-3000000-1000000= 1250000

Residual value:

Scenario 1= 250000*16.7%= 41750₹

Imputed interest= 250000*20%= 50000

RI= 41750-50000= -8250

Scenario 2= 1250000*50%= 625000₹

Imputed interest=1250000*20%= 250000₹

RI=625000-250000= 3,75,000₹

It is a profit. This is due to the cost of capital being lesser than earnings.


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