Concept explainers
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
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. Compute the ROI ratio (operating income to total assets) of each division using historical-cost measures. Comment on the results.
Required
- 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.
- 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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