Numerical Problem on ROI and

Residual Income
The average asset balances of the Apparel division's of Ibis
for 2019 are given below:
Cash
Receivable 2,50,000
s 3,75,000
Inventory
Raw materials 2,50,000
Works in process 1,30,000
Finished goods 2,45,000 6,25,000
Gross fixed assets 25,00,000
Accumulated 10,00,000 15,00,000
depreciation
Total: 27,50,000
Solution:
Current liabilities 7,50,000
Equity
1) Return on investment = 20,00,000
Total liabilities and 27,50,000
equity
(Profit before tax/Investment base) x 100

ROI = (Rs. 3,00,000/20,00,000) x 100

Questions: =15%
During 2019 the Apparel division earned a profit of Rs. 3,00,000
2)
before taxes Residual
on total saleIncome:
of Rs. 40,00,000.
Profit before tax
1) Compute ROI using net total assets (that is total assets less
currentRs. 3,00,000
liabilities) as the investment base.
2) Compute RI using a capital charge of 10% on net total
Net Total Assets=Total Assets-Current Liabilities
assets.
27,50,000-7,50,000 = 20,00,000
Capital charge (Rs. 20,00,000 x .10)

2,00,000

Residual Income = 3,00,000-2,00,000 =

Rs. 1,00,000