ROI performance measures based on historical cost and current cost. Mineral Waters Ltd. operates three divisions that
Question:
ROI performance measures based on historical cost and current cost. Mineral Waters Ltd. operates three divisions that process and bottle sparkling mineral water. The historicalcost accounting system reports the following data for 2007:
Calistoga Division Alpine Springs Division Rocky Mountains Division Revenues $600,000 $ 840,000 $1,320,000 Operating costs (excluding amortization) 360,000 456,000 720,000 Plant amortization 84,000 120,000 144,000 Operating income $156,000 $ 264,000 $ 456,000 Current assets $240,000 $ 300,000 $ 360,000 Fixed assets—plant 168,000 1,080,000 1,584,000 Total assets $408,000 $1,380,000 $1,944,000 Mineral Waters estimates the useful life of each plant to> be twelve years with a zero terminal disposal price. The straight-line amortization method is used. At the end of 2007, the Calistoga plant is ten years old, Alpine Springs plant is three years old, and Rocky Mountains plant is one year old.
An index of construction costs of plants for mineral water production for the ten-year period that Mineral Waters has been operating (1997 year-end = 100) is:
1997 2004 2006 2007 100 136 160 170 Given the high turnover of current assets, management believes diat the historical-cost and current-cost measures of current assets are approximately the same.
Required 1. Compute the ROI (operating income to total assets) ratio of each division using historicalcost measures. Comment on the results.
2. Use the approach in Exhibit 24-2
(p. 929) to compute the ROI of each division, incor¬
porating current-cost estimates as of 2007 for amortization and fixed 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 die three divi¬
sions?
Step by Step Answer:
Cost Accounting A Managerial Emphasis
ISBN: 9780131971905
4th Canadian Edition
Authors: Charles T. Horngren, George Foster, Srikant M. Datar, Howard D. Teall