Question

Natural Bounty Corporation operates three divisions that process and bottle natural fruit juices. The historical- cost accounting system reports the following information for 2012:


Natural Bounty estimates the useful life of each plant to be 12 years, with no terminal disposal value. The com-pany uses the straight- line depreciation method. At the end of 2012, the Passion Fruit plant is 10 years old, the Kiwi Fruit plant is 5 years old, and the Mango Fruit plant is 2 years old. An index of construction costs over the 10- year period that Natural Bounty has been operating (2002 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 in Exhibit 16- 2 ( page 674) to compute the ROI of each division, incorporating current- cost estimates as of 2012 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 threedivisions?


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  • CreatedJanuary 15, 2015
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