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Hi John.
ROI is calculated by taking controllable profit divided by the capital investment in percentage figures.
Could you please tell me what is controllable profit in the profit statement?
Average capital investment = (opening capital + closing capital) / 2
But if we are given closing capital (but no opening capital) then do we need to divide closing capital with 2 to get the average capital like this:
Average capital investment = closing capital / 2
As I explain in my free lectures, the controllable profit is the profit calculated using only expenses that are controlled by the divisional manager (not including those expenses that are fixed by the head office).
As far as the capital employed is concerned, unless the question specifies which capital employed to use the examiner prefers using the opening capital.
If it asks for the average to be used then it is half-way between the opening and closing (i.e. (opening + closing)/2) ). Is it asks you to use the closing capital (or if that is the only figure available), then it is the closing capital (not half of it, which would make no sense 🙂 ).
ROI can be calculated using both formulae depending upon the requirement of the question (like this).
ROI = (Controllable Profit / Capital Investment) x 100
ROI = (Controllable PBIT / Avg Capital Employed) x 100This is the way controllable profit is calculated in the profit statement.
Controllable sales revenue
less: controllable costs
Gross Profit
less: controllable expenses
Controllable Profit
less: costs controlled by head office
Net ProfitAll the depreciation cost and others costs controlled by the head office is deducted from the controllable profit to get the net profit?
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