LUSAKA Plc has two divisions, GAMMA and OMEGA, whose respective performances are under review. Division GAMMA...

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Accounting

LUSAKA Plc has two divisions, GAMMA and OMEGA, whose respectiveperformances are under review. Division GAMMA is currently earninga profit of K35,000 and has net assets of K150,000. Division OMEGAcurrently earns a profit of K70,000 with net assets ofK325,000.
LUSAKA Plc has a current cost of capital of 15%.
Required:
(a) Explain the difference between a profit centre and aninvestment centre of an organisation. [3Marks]
(b) Using the information above, calculate the return oninvestment and residual income figures for the two divisions underreview and comment on your results. [5 Marks]
(c) Explain which method of performance evaluation (i.e. returnon investment or residual income) is more useful when comparingdivisional performance. [2 Marks]

Answer & Explanation Solved by verified expert

3.8 Ratings (509 Votes)

The key difference between the investment center and cost center is that cost center is responsible only for the revenue and cost related decision Profit making is the motive of that cost center with the limited resources what it have currently However the main motive of the investment center is to look after all the aspects like the cost revenue profit Together See Answer

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