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Capital employed is ₹750000 and normal rate of return is 12%. What is normal profit?

Answer and explanation

Correct answer: ₹90000

Normal profit is the return that the business would ordinarily earn on its capital employed at the normal rate of return. The governing formula is: Normal Profit = Capital Employed × Normal Rate of Return. Convert 12% to 12/100 and calculate ₹7,50,000 × 12/100 = ₹90,000. Thus option A is correct. Option B incorrectly treats the capital as if it were the profit, option C uses the rate as a rupee amount and ignores the capital base, and option D subtracts the rate-related amount from capital. Normal profit is later compared with average profit to determine super profit for goodwill valuation.

Related tags

GoodwillNormal ProfitCapital EmployedPartnership Accounts Basic ConceptsAccountancyClass 12 Mcq

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