QUESTION 3 25 marks (45 minutes) 1 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 statement for these two divisions for October are as shown below: Y Z (N$) (N$) Sales revenue 900 000 555 000 Less: Variable costs (345 000 (312 000) Contribution 555 000 243 000 Less: Controllable fixed costs (includes depreciation (95 000) (42 000) of divisional assets) Controllable income 460 000 201 000 Less: Apportioned central costs (338 000) (180 000) Profit before tax 122 000 21 000 Total divisional net assets N$9 760 000 N$1 260 000 The company currently has a target return on capital of 12 per cent 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 is assessed primarily on the basis of Return on Investment (ROI). Marks 10 10 REQUIRED 3.1. Calculate the annualised return on investment (ROI) for division Y and Z, and discuss the relative performance of the two divisions using ROI data and other information given above. 3.2. Calculate the annualised residual income (RI) for division Y and Z, using 10% imputed interest rate and explain the implications of this information for the evaluation of the division's performance. 3.3. Briefly discuss the strength and weakness of ROI and RI as methods of assessing the performance of divisions. TOTAL MARKS 5. 25