The following figures apply to a small manufacturing company. Particulars Amount (₹) Annual sales for the previous year 46,00,000 Profit after tax for the previous year 2,70,960 Budgeted annual sales for the next year 48

To calculate the alteration in the Return on Capital Employed (ROCE) ratio, we need to calculate ROCE for both the previous year and the next year. ROCE can be calculated as: (Profit After Tax / Capital Employed) × 100 Alternatively, using the DuPont model: (Profit After Tax / Sales) × (Sales / Capital Employed) × 100 Where: Profit to Turnover Ratio = (Profit After Tax / Sales) × 100 Capital Turnover Ratio = (Sales / Capital Employed) × 100 Previous Year: Annual Sales = ₹46,00,000 Profit After Tax = ₹2,70,960 Average Total Assets (Capital Employed) = ₹40,00,000 1. Profit to Turnover Ratio (Previous Year): = (₹2,70,960 / ₹46,00,000) × 100 = 5.89% 2. Capital Turnover Ratio (Previous Year): = (₹46,00,000 / ₹40,00,000) × 100 = 115% 3. ROCE (Previous Year): = (Profit After Tax / Capital Employed) × 100 = (₹2,70,960 / ₹40,00,000) × 100 = 6.774% (Alternatively: 5.89% × 115% = 6.7735%) Next Year (Budgeted): Budgeted Annual Sales = ₹48,40,000 Budgeted Profit After Tax = ₹2,80,000 Estimated Average Total Assets (Capital Employed) = ₹44,00,000 1. Profit to Turnover Ratio (Next Year): = (₹2,80,000 / ₹48,40,000) × 100 = 5.785% (approx. 5.79%) 2. Capital Turnover Ratio (Next Year): = (₹48,40,000 / ₹44,00,000) × 100 = 110% 3. ROCE (Next Year): = (Profit After Tax / Capital Employed) × 100 = (₹2,80,000 / ₹44,00,000) × 100 = 6.364% (Alternatively: 5.785% × 110% = 6.3635%) Alteration in ROCE: ROCE (Previous Year) = 6.774% ROCE (Next Year) = 6.364% Alteration = 6.364% - 6.774% = -0.41% (a decrease) Reasons for such alteration: The ROCE is expected to decrease from 6.774% to 6.364%. This alteration is due to changes in both the profit to turnover ratio and the capital turnover ratio: 1. Profit to Turnover Ratio: This ratio has decreased from 5.89% (previous year) to 5.79% (next year). This indicates a slight decline in the company's ability to convert sales into profit, possibly due to increased operating costs or a less favorable sales mix, despite an increase in sales volume. The profit growth (₹9,040) is not proportionate to sales growth (₹2,40,000). 2. Capital Turnover Ratio: This ratio has declined significantly from 115% (previous year) to 110% (next year). This suggests that while sales have improved, the additional capital employed (assets) has not resulted in a proportionate increase in sales. The company is becoming less efficient in utilizing its assets to generate sales. * Increase in capital employed = ₹44,00,000 - ₹40,00,000 = ₹4,00,000 (10% increase over original capital). * Increase in sales = ₹48,40,000 - ₹46,00,000 = ₹2,40,000 (5.22% increase over previous year's sales). The sales growth (5.22%) is less than the capital employed growth (10%), indicating a less efficient utilization of new capital. If we compare the additional profit generated by additional capital employed: Additional Profit = ₹2,80,000 - ₹2,70,960 = ₹9,040 Additional Capital Employed = ₹44,00,000 - ₹40,00,000 = ₹4,00,000 Return on Additional Capital Employed = (₹9,040 / ₹4,00,000) × 100 = 2.26%. This 2.26% return on additional capital is significantly lower than the previous year's overall ROCE of 6.774%, which drags down the overall ROCE for the next year. In summary, the decrease in ROCE is primarily due to a less efficient utilization of additional capital to generate sales and a slight reduction in profit margins.