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# Question: Mineral Waters Ltd. operates three divisions that

Mineral Waters Ltd. operates three divisions that process and bottle sparkling mineral water. The historical-cost accounting system reports the following data for 2015:

Mineral Waters estimates the useful life of each plant to be 12 years with a zero terminal disposal price. The straight-line depreciation method is used. At the end of 2015, the Calistoga plant is 10 years old, the Alpine Springs plant is 3 years old, and the Rocky Mountains plant is 1 year old. An index of construction costs of plants for mineral water production for the 10-year period that Mineral Waters has been operating (2005 year-end = 100) is:

Given the high turnover of current assets, management believes that the historical-cost and current cost measures of current assets are approximately the same. Required: 1. Compute the ROI (operating income to total assets) ratio of each division using historical-cost measures. Comment on the results. 2. Use the approach into compute the ROI of each division, incorporating current-cost estimates as of 2015 for depreciation and fixed assets. Comment on the results. 3. What advantages might arise from using current-cost asset measures as compared with historical cost measures for evaluating the performance of the managers of the three divisions?

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Alpine Springs Division Rocky Mountains Calistoga Division Division Revenues \$600,000 \$ 840,000 \$1,320,000 Operating costs (excluding depreciation) 360,000 456,000 720,000 Plant depreciation 84,000 120,000 144,000 \$ 264,000 \$ 300,000 \$ 456,000 \$ 360,000 Operating income \$156,000 Current assets \$240,000 Fixed assets-plant 168,000 1,080,000 1,584,000 Total assets \$408,000 \$1,380,000 \$1,944,000 2005 2012 2013 2014 2015 100 136 149 160 170