Chapter 23, Problem 23.33P

ROI performance measures based on historical cost and current cost. Nature’s Juice Corporation operates three divisions that process and bottle natural fruit juices. The historical-cost accounting system reports the following information for 2017:

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	2014	2016	2017
100	120	185	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. 1. Compute the ROI ratio (operating income to total assets) of each division using historical-cost measures. Comment on the results.

Required

1. 2. Use the approach in Figure 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.
2. 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?