Passion Fruit Division Kiwi Fruit Division Mango Fruit Division Revenues Operating costs (excluding plant depreciation) Plant depreciation Operating income S1,300,000 $1,800,000 $2,400,000 1,050,000 550,000 270,000 900,000 290,000 $ 480,000 175,000 $ 575,000 $1,210,000 Current assets Long-term assets-plant Total assets $ 425,000 540,000 $ 965,000 $ 600,000 1,575,000 $ 700,000 3,190,000 $2,175,000 $3,890,000 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 2017, 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 (2007 year-end = 100) is as follows: 2007 100 2016 185 2014 2017 120 200 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 ratio (operating income to total assets) of each division using historical-cost measures. Comment on the results. 2. Use the approach in Exhibit 23-2 (page 902) to compute the ROI of each division, incorporating current- cost estimates as of 2017 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 three divisions? Required
Passion Fruit Division Kiwi Fruit Division Mango Fruit Division Revenues Operating costs (excluding plant depreciation) Plant depreciation Operating income S1,300,000 $1,800,000 $2,400,000 1,050,000 550,000 270,000 900,000 290,000 $ 480,000 175,000 $ 575,000 $1,210,000 Current assets Long-term assets-plant Total assets $ 425,000 540,000 $ 965,000 $ 600,000 1,575,000 $ 700,000 3,190,000 $2,175,000 $3,890,000 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 2017, 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 (2007 year-end = 100) is as follows: 2007 100 2016 185 2014 2017 120 200 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 ratio (operating income to total assets) of each division using historical-cost measures. Comment on the results. 2. Use the approach in Exhibit 23-2 (page 902) to compute the ROI of each division, incorporating current- cost estimates as of 2017 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 three divisions? Required
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Passion Fruit Division Kiwi Fruit Division Mango Fruit Division
Revenues
Operating costs
(excluding plant depreciation)
Plant depreciation
Operating income
S1,300,000
$1,800,000
$2,400,000
1,050,000
550,000
270,000
900,000
290,000
$ 480,000
175,000
$ 575,000
$1,210,000
Current assets
Long-term assets-plant
Total assets
$ 425,000
540,000
$ 965,000
$ 600,000
1,575,000
$ 700,000
3,190,000
$2,175,000
$3,890,000
Transcribed Image Text: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 2017, 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 (2007 year-end = 100) is as follows:
2007
100
2016
185
2014
2017
120
200
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 ratio (operating income to total assets) of each division using historical-cost measures.
Comment on the results.
2. Use the approach in Exhibit 23-2 (page 902) to compute the ROI of each division, incorporating current-
cost estimates as of 2017 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 three divisions?
Required
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