LUSAKA Plc has two divisions, GAMMA and OMEGA, whose respectiveperformances are under review. Division GAMMA is currently earninga profit of K35,000 and has net assets of K150,000. Division OMEGAcurrently earns a profit of K70,000 with net assets ofK325,000.
LUSAKA Plc has a current cost of capital of 15%.
Required:
(a) Explain the difference between a profit centre and aninvestment centre of an organisation. [3Marks]
(b) Using the information above, calculate the return oninvestment and residual income figures for the two divisions underreview and comment on your results. [5 Marks]
(c) Explain which method of performance evaluation (i.e. returnon investment or residual income) is more useful when comparingdivisional performance. [2 Marks]
