The cruise ship company discloses: The most significant assets (ships, ship improvements, ships under construction) represent

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Question:

The cruise ship company discloses:
• The most significant assets (ships, ship improvements, ships under construction) represent 80 % of the total assets.
• The ship depreciation expense represents 11% of the cruise cost and expenses.

The following information illustrates the accounting flexibility that the company has in measuring their key success factors and risks:
• The cruise company’s estimate of the average useful life of the ships is 30 years.
• The residual value is set at 15 percent of the ship’s initial costs.
• Depreciation would have increased by $ 50 mln assuming the estimated 30 year useful life would be reduced by one year at the time they took delivery or acquired the ship.
• In addition the ship depreciation expense would have increased by approximately $ 205 mln if the company had estimated the ships to have no residual value at the time of their delivery or acquisition.
• $ 50 mln was equivalent to roughly 3 percent of the company’s operating income.

1. With the given information you should be able to calculate: (explain your calculations)
a. The annual depreciation expense.
b. The cost base at acquisition
c. The gross margin (of the year, when $ 50 mln. was equivalent to 3 percent of operating income)

2. Management performance is sometimes measured in terms of Return on assets (ROA).
a. How would you calculate this?
b. Can you conclude anything about the sensitivity of this performance ratio to the key assumptions mentioned above?