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	$	2,300
	Operating costs		1,320
	Operating income	$	980

COSMETICS DIVISION
Income Statement
For the Year Ended December 31, 2019 (000s)
	Revenues	$	1,620
	Operating costs		790
	Operating income	$	830

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 $114,000 per year for each division. The manufacturing facility is the only long-lived asset of either division. Current assets are $334,000 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
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.

Answer 1

un Answer Page: No Rclürn on investment CRO2) Net book value of fixed asselõ for health care 114000 X 17 yos = $1,935,000 (* y) Het book value of fixed assets for cosmetics - 114000 X 15 yms 15yrs Healthcare, Ron $980,000 $1,938,000 + 334000 143.13% $1,410,000 (216) Cosmetico , ROI $830,000 $1,710,000 + 334000 40.61% @ @ Groms book value for healthcare = 14000X@lyro $2,394,000 Health ca 4980,000 care, ROI 35.92 % $2,394,000 + 334000 $830,000 30.43% $2,394,000 +334000 Cosmetics, ROI 6 Corst index in 2019 'Health care - GBV at historical card x coof indez in year of contra -ction 2015 $2,850,000 100 2,394,000 X 84 2394000 X- 80 cosmetics = 2,992,500

Health care rol 6980,000 bge. No ) $ 2,850,000 + $334000 30.787 Cosmetics, ROI $830,000 $2,992,500 + $ 334000 =124.95% © Health care = $1,938,000x 100 84 $2,307,14 3 Cosmetics= $1,710,000 X 100 80 Healthcare, ROI cosmetics, ROT 33.58% $980,000 $ 2,137,500 $980,000 - 34,11% $2,307,143 + $334000 $830,000 $2,137,500 +$334000 @ Based on current replacement cook of fixed assets Healthcare, ROD 59.98% $1300,000 +$334000 Cosmetics, ROT $830,000 $1,300,000 + 334000 © Based on current liquidation value Healthcare $980,000 ROI $400,000 + 334000 Cosmetics, ROT $830,000 700,000 + 334000 50.80% 133.51% $ 80.27%