The General Electric Approach {Adapted from David Solomons, Dzzsional Performance: Measurement and Control (New York: Financial Executives Research Foundation, Inc., 1965)] Consider the following:

(000’S OMITTED)
Division Division A B Total assets $1,000 $5,000 Net annual earnings $ 200 $ 750 Rate of return on total assets 20% 15%

iL, 2.
Which is the more successful division? Why?
General Electric Company has chosen “residual income,” the excess of net earnings over the cost of capital, as the measure of management success—the quantity a manager should try to maximize. The cost of capital is deducted from the net annual earnings to obtain residual income. Using this criterion, what is the residual income for each division if the cost of capital is:

(a) 12 percent,

(b) 14 percent,

(c) 1744 percent? Which division is more successful under each of these rates? lop1