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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 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?

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:
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?

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


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