Intermediate: Return on investment and residual income. Southe Plc has two divisions, A and B, whose respective performances are under review.

Division A is currently earning a profit of £35000 and has net assets of £150000.

Division B currently earns a profit of £70000 with net assets of £325000.

South Pic has a current cost of capital of 15 per cent.

Required:

(a) Using the information above, calculate the return on investment and residual income figures for the two divisions under review and comment on your results. (5 marks)

(b) State which method of performance evaluation (i.e. return on investment or residual income) would be more useful when comparing divisional performance and why.

(2 marks)

(c) List three general aspects of performance measures that would be appropriate for a service sector company.

(3 marks)

ACCA Paper 1.2 - Financial Information for Management