Question

Ready Products Inc. operates two divisions, each with its own manufacturing facility. The accounting system reports the following data for 2019:

HEALTH CARE PRODUCTS DIVISION
Income Statement
For the Year Ended December 31, 2019 (000s)
	Revenues	$	1,700
	Operating costs		1,020
	Operating income	$	680

COSMETICS DIVISION
Income Statement
For the Year Ended December 31, 2019 (000s)
	Revenues	$	1,260
	Operating costs		610
	Operating income	$	650

Ready estimates the useful life of each manufacturing facility to be 21 years. As of the end of 2019, the plant for the health care division is 4 years old, while the manufacturing plant for the cosmetics division is 6 years old. Each plant had the same cost at the time of purchase, and both have useful lives of 21 years with no salvage value. The company uses straight-line depreciation and the depreciation charge is $90,000 per year for each division. The manufacturing facility is the only long-lived asset of either division. Current assets are $322,000 in each division.

An index of construction costs, replacement costs, and liquidation values for the manufacturing facilities for the period that Ready has been operating is as follows:

									Liquidation Value
	Year	Cost Index			Replacement Cost				Health Care				Cosmetics
	2013		80			$	100,000			$	700,000			$	700,000
	2014		82				100,000				700,000				700,000
	2015		84				1,100,000				400,000				400,000
	2016		89				1,150,000				400,000				500,000
	2017		94				1,200,000				500,000				600,000
	2018		96				1,250,000				500,000				600,000
	2019		100				1,300,000				400,000				700,000

Required:

(Round your answers to 2 decimal places.)

1. Compute return on investment (ROI) for each division using the historical cost of divisional assets (including current assets) as the investment base.

2. Compute ROI for each division, incorporating current-cost estimates as follows:

a. Gross book value (GBV) of long-lived assets plus book value of current assets.

b. GBV of long-lived assets restated to current cost using the index of construction costs plus book value of current assets. (Do not round intermediate calculations. Round dollar values to the nearest whole dollar.)

c. Net book value (NBV) of long-lived assets restated to current cost using the index of construction costs plus book value of current assets. (Do not round intermediate calculations. Round dollar values to the nearest whole dollar.)

d. Current replacement cost of long-lived assets plus book value of current assets.

e. Current liquidation value of long-lived assets plus book value of current assets.

Solve:

Health Care 1. % Return on investment based on historical cost of divisional assets 2a. Return on investment based on gross book value 2b. Return on investment based on gross book value at current cost 2c. Return on investment based on net book value at current cost 2d. Return on investment based on current replacement cost 2. Return on investment based on current liquidation value % % % Cosmetics % % % % % % % %

Answer 1

Answer page: 01 ") compute return on investment (Rou) net book value of fleed assets for each division $90000x14 $1530000 $ 90000 x 15 $ 1350000 Rol Health care $680 health care cosmetics = 136.717. 15306 322 $650 138.871%. Cosmetics 1350+322 care Cosmetic division is more profitable than the health division based on Rol (D) a) Geoss book value for each division = (depreciation x life) Health care - $90000 X 21 = $1890000 cosmetic $90000X 21 $1890000 ROL: Health care $ 680 30.7466 1890+322 $650 Healthware Cosmetic 129.38.1. 1890+322 b) GBy $ long-lived assets cost index in 2019 GBV at historical costx cost index in year 4 construction = $1890000 x $ 2250000 84 Cosmetic = $1890000 x 100 $2362500 80 100

Health care $680 26.43.1. page-02 22507322 $650 Cosmetic 34.21.). 2362 4322 c) net book value of long lived assets Health care 1821428 $1530000 x 100 84 = $1350000 x 100 cosmetic 1687500 80 Rol: Health care $680 31.731, cosmetic 18217322 $650 16874322 32.35.), d) Curient mieplanement cost-4 long-lived assets Role Healthcare $680 41.92-1. 1300+322 Cosmetics $650 = 40.07.1. (300+322 lived assets e) ceux tient liquidation value no long $ 680 Rol: Healthcare - 94.1811. 400 +322 cosmetic $650 = 63.60.1. 700 +322