Question

Nature’s Elixir Corporation operates three divisions that process and bottle natural fruit juices. The historical-cost accounting system reports the following information for 2013:
Nature’s Elixir estimates the useful life of each plant to be 12 years, with no terminal disposal value. The straight-line amortization method is used. At the end of 2013, 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 (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.
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 24-3 (p. 977) to compute the ROI of each division, incorporating current-cost estimates as of 2013 for amortization 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?


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  • CreatedJuly 31, 2015
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