8 Y and Z are two divisions of a large company that operate in similar markets. The divisions are treated as investment centres and every month they each prepare an operating statement to be submitted to the parent company. Operating statements for these two divisions for October are shown below: Operating Statements for October Y Z RM '000 RM '000 Sales revenue 900 555 Less: Variable costs 345 312 Contribution 555 243 Less: Controllable fixed costs 95 42 (includes depreciation on divisional assets) Controllable income 460 201 Less: Apportioned central costs 338 180 Net income before tax 122 21 Total divisional net assets RM9.76m RM1.26m The company currently has a target return on capital of 12% per annum. However, the company believes its cost of capital is likely to rise and is considering increasing the target return on capital. At present the performance of each division and the divisional management are assessed primarily on the basis of return on investment (ROI). Required: a. Calculate the annualized return on investment (ROI) for divisions Y and Z, and discuss the relative performance of the two divisions using the ROI data and other information given above. b. Calculate the annualized residual income (RI) for divisions Y and Z, and explain the implications of this information for the evaluation of the divisions' performance. c. Briefly discuss the strengths and weaknesses of ROI and RI as methods of assessing the performance of divisions. Explain two further methods of assessment of divisional performance that could be used in addition to ROI or RI. (CIMA, 2005)