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Question: Nature’s Elixir Corporation operates three

Nature’s Elixir Corporation operates three divisions that process and bottle natural fruit juices. The historical-cost accounting system reports the following information for 2015:
Nature’s Elixir Corporation operates three divisions that process and bottle natural fruit juices. The historical-cost accounting system reports the following information for 2015:


Nature’s Elixir estimates the useful life of each plant to be 12 years, with no terminal disposal value. The straight-line depreciation method is used. At the end of 2015, the Passion Fruit plant is 10 years old, the Kiwi Fruit plant is 3 years old, and the Mango Fruit plant is 1 year old. An index of construction costs over the 10-year period that Nature’s Elixir 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 ratio (operating income to total assets) 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 expense and long-term 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?

Nature’s Elixir estimates the useful life of each plant to be 12 years, with no terminal disposal value. The straight-line depreciation method is used. At the end of 2015, the Passion Fruit plant is 10 years old, the Kiwi Fruit plant is 3 years old, and the Mango Fruit plant is 1 year old. An index of construction costs over the 10-year period that Nature’s Elixir has been operating (2005 year-end = 100) is
Nature’s Elixir Corporation operates three divisions that process and bottle natural fruit juices. The historical-cost accounting system reports the following information for 2015:


Nature’s Elixir estimates the useful life of each plant to be 12 years, with no terminal disposal value. The straight-line depreciation method is used. At the end of 2015, the Passion Fruit plant is 10 years old, the Kiwi Fruit plant is 3 years old, and the Mango Fruit plant is 1 year old. An index of construction costs over the 10-year period that Nature’s Elixir 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 ratio (operating income to total assets) 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 expense and long-term 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 ratio (operating income to total assets) 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 expense and long-term 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?





Transcribed Image Text:

Passion Fruit Kiwi Fruit Mango Fruit Division Division Division Revenues $1,000,000 $1,400,000 $ 2,200,000 Operating costs (excluding plant depreciation) Plant depreciation 600,000 760,000 1,200,000 140,000 $ 260,000 $ 400,000 200,000 240,000 $ 440,000 $ 500,000 1,800,000 $2,300,000 $ 760,000 $ 600,000 2,640,000 $ 3,240,000 Operating income Current assets Long-term assets-plant 280,000 Total assets $ 680,000 2005 2012 2014 2015 100 136 160 170


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