Mineral Waters Ltd operates three divisions that process and bottle
Mineral Waters Ltd. operates three divisions that process and bottle sparkling mineral water. The historical-cost accounting system reports the following data for 2013:
Mineral Waters estimates the useful life of each plant to be 12 years with a zero terminal disposal price. The straight-line amortization method is used. At the end of 2013, 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 (2003 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.
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 in Exhibit 24-3 (p. 977) to compute the ROI of each division, incorporating current-cost estimates as of 2013 for amortization 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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