Delta Iron Works Inc. has adopted a responsibility accounting approach in evaluating the performance of its works managers. It has several workshops across the state. In one of such workshop, the manager acquired fixed assets worth $260,000 with a useful life of 4 years and without any residual value. The workshop uses the straight-line method of charging depreciation on fixed assets. The workshop manager is evaluated based on the income in relation to the fixed assets of the workshop. Annual net income after deducting depreciation is $10,000. 

Assume that sales, and all expenses except depreciation, are on a cash basis. Dividends equal net income. Thus, cash in the amount of depreciation charge will accumulate each year. The workshop manager’s performance is judged in relation to fixed assets because all current assets, including cash, are controlled centrally. Assume that any cash accumulated remains idle. Ignore taxes.

1. Prepare a comparative tabulation of the plant’s rate of return and the company’s overall rate of return based on 

a. Gross (i.e., original cost) assets.

b. Net book value of assets.

2. Evaluate the relative merits of gross assets and net book value of assets as investment bases.