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