Question 4 L\&M Home Furnishing plc is a divisonalised company. Among its divisions are kitchen and bedroom furnishings. The kitchen division includes the design, manufacture and installation of high-end traditional kitchens; the bedroom division includes the sale of high-quality bedroom fumiture including beds and dressing tables. The following information relates to the year ended 31 March 2019: All day-to-day operations are delegated to divisional managers whose performance is monitored with the aid of budgets and reports. The basis for appraising divisional manager performance is currently under review. At present divisions are treated as investment centres for the performance appraisal of each divisional manager, but there is disagreement as to whether return on capital employed or residual income is the better measure. An alternative suggestion has been made that divisional manager performance should be appraised on the basis of controllable profit. This measure would exclude depreciation and gains or losses on sale of assets, treating investment in non-current assets as a central management responsibility. The cost of capital of L\&M Home Furnishing plc is 15% per annum. Requirement (a) Calculate, for both divisions, the three measures (retum on capital employed, residual income and controllable profit) which are being considered by L\&M Home Furnishing plc. State any assumptions or reservations about the data you have used in your calculations. 6 Marks (b) Examine the merits and problems of the suggested approaches to divisional manager performance appraisal, and briefly suggest how central management could determine the required level of performance in each case. 14 Marks