As the chief executive officer of Shoe Unlimited 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 above.
3. What do these measures indicate about the performance of the divisions?
Of the division managers? Which measure do you prefer? Why?

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NET ASSETS BASED ON HISTORICAL REPLACEMENT HISTORICAL OPERATING INCOME BASED ON* REPLACEMENT DIVISION COST COST COST COST Shoes $15,000 $15,000 $2,700 $2,700 Clothing Accessories 45,000 30,000 55,000 6,750 6,150 48,000 4,800 3,900 * The differences in operating income between historical and replacement cost are attributable to the differences in amortization expenses.