Table 1 shows information from a small manufacturer of solar garden lights. The manufacturer has invested capital in machinery and wants to judge whether th...
Question 1 Report
Table 1 shows information from a small manufacturer of solar garden lights. The manufacturer has invested capital in machinery and wants to judge whether this investment is producing enough operating profit. It is also deciding whether to start manufacturing a second product.
| Item | Amount ($) |
|---|---|
| Operating profit | 54,000 |
| Capital employed | 360,000 |
| Interest on loan | 12,000 |
(a) Identify the ratio that compares operating profit with capital employed. [1]
(b) Show the return on capital employed. [1]
(c) Explain why the manufacturer should compare this result with a target or competitor result. [2]
Answer Details
(a) The ratio comparing operating profit with capital employed is return on capital employed, usually called ROCE. [1]
(b)
\[\text{ROCE}=\frac{\$54\,000}{\$360\,000}\times100=15\%\]
The return on capital employed is 15%. [1]
(c) A percentage on its own does not show whether performance is good or poor. Comparing 15% with a target or competitor result shows whether the capital is earning an acceptable return relative to alternatives. [2]
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