Question

Nature’s Juice Corporation operates three divisions that process and bottle natural fruit juices. The historical-cost accounting system reports the following information for 2014:


Nature’s Juice 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 2014, 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 Juice has been operating ( 2004 year-end = 100) is as follows:


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 to compute the ROI of each division, incorporating current-cost estimates as of 2014 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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  • CreatedMay 14, 2014
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