LUSAKA Plc has two divisions, GAMMA and OMEGA, whose respective performances are under review. Division GAMMA is currently earning a profit of K35,000 and has net assets of K150,000. Division OMEGA currently earns a profit of K70,000 with net assets of K325,000.

LUSAKA Plc has a current cost of capital of 15%.

Required:

(a) Explain the difference between a profit centre and an investment centre of an organisation. [3 Marks]

(b) 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]

(c) Explain which method of performance evaluation (i.e. return on investment or residual income) is more useful when comparing divisional performance. [2 Marks]