The Question on Financial Measure.

Success Learners (SL) provides tuition services for students studying for professional accountancy examinations. SL has grown from a small tuition service provider, to a position where it now owns two large centres in the country's capital city. Each centre operates as an investment centre. Centre managers are evaluated based on Return on Investment (ROD), and receive a bonus if their tuition centre generates an annual ROI of 15% or more. At the start of this year, centre managers were informed that each centre would be allocated a portion of the SL head office's fixed overhead costs. 7% of a centre's sales revenue is allocated and this is included as part of the centre's other operating costs. SL head office will keep the target ROI at 15%. The following is a summary performance report for Centre A and Centre B: Centre A Centre B (Figures in $'000) Current Year Prior Year Current Year Prior Year Sales Revenue 1,300 1,200 550 500 Material costs 190 180 80 75 Staff costs 355 350 150 150 Other operating costs 531 460 259 180 Profit 224 210 61 95 Assets 1,600 1,500 400 600 Part A Required: (a) Describe one (1) advantage and one (1) disadvantage of each tuition centre being charged a portion of SL head office's fixed overhead costs. (5 marks) (b) Based on available information, evaluate and discuss the performance of both tuition centres. Include in your discussion an assessment of the suitability of SL using ROI for performance evaluation and reward. (20 marks) (c) Compute the Residual Incomes (RIs) of each tuition centre. Assess the suitability of SL using RI instead of ROI for performance evaluation and reward. Note: SL has a cost of capital of 8%. (13 marks)