As the CEO of Friendly Hardware Company, you examined the following measures of the performance of three divisions (in thousands of dollars). 

1. Calculate for each division the rate of return on net assets and the residual income based on historical cost and on replacement cost. For purposes of calculating residual income, use 10 percent as the minimum desired rate of return. 

2. Rank the performance of each division under each of the four different measures computed in number 1. 

3. What do these measures indicate about the performance of the divisions? Of the division managers? Which measure do you prefer? Why?

Transcribed Image Text:

Average Net Assets Based Operating Income Based On On* Historical Replacement Historical Replacement Cost Division Cost Cost Cost $2,600 6,150 3,900 $15,000 Appliances 44,000 Lighting Tools $15,000 $2,600 55,000 6,750 48,000 27,000 5,000