Question: 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. 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 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?