T-Shirts R Us Inc T-Shirts R Us Inc $\text { Liquidation Value }$

question 17

Essay

T-shirts R Us Inc. operates two divisions that each manufactures t-shirts for universities. Each division has its own manufacturing facility. The historical-cost accounting system reports the following financial data for 2019. $$\begin{array} { | l | r | r | } \hline { \text { Atlantic Coast Division } } \\\text { Income Statement (000s) } \\\hline \text { Revenues } & & \$ 600 \\\hline \text { Operating Costs } & & 470 \\\hline \text { Operating Income } & & \$ 130 \\\hline { \text { Big-10 Division } } \\{ \text { Income Statement (000s) } } \\\hline \text { Revenues } & & \$ 600 \\\hline \text { Operating Costs } & & \underline { 400 } \\\hline \text { Operating Income } & & \$ 200 \\\hline\end{array}$$ T-shirts R Us Inc. estimates the useful life of each manufacturing facility to be 15 years. The company uses straight line depreciation, with a depreciation charge of $70,000 per year for each division and no salvage value at the end of 15 years. The manufacturing facility is the only long-lived asset of either division. Current assets are $300,000 in each division. At the end of 2019 the Atlantic Coast Division is 4 years old and the Big-10 Division is 6 years old. An index of construction costs, replacement cost, and liquidation values for manufacturing facilities used in the production of t-shirts for the 7-year period that T-shirts R Us Inc. has been operating, are as follows: $\text { Liquidation Value }$
$\begin{array}{cccccc}\hline&&\text { Replacement }\\\text { Year } & \text { Cost Index } & \text { Cost } & \text { Atlantic Coast } & \text { Big 10 } \\2013 & 80 & \$ 1,000,000 & \$ 800,000 & \$ 800,000\\2014 & 82 & 1,000,000 & 800,000 & 800,000 \\2015 & 84 & 1,100,000 & 700,000 & 700,000 \\2016 & 89 & 1,150,000 & 700,000 & 600,000\\2017 & 94 & 1,200,000 & 800,000 & 600,000 \\2018 & 96 & 1,250,000 & 900,000 & 600,000 \\2019 & 100 & 1,300,000 & 1,000,000 & 500,000\end{array}$ Required:
Round answers to 2 decimal places where appropriate.
1. Compute return on investment (ROI) for each division using net book value (NBV). Interpret the results.
2. Compute return on investment (ROI) for each division, incorporating current-cost estimates as follows, using:
(a) Gross book values (GBV) under historical cost;
(b) GBV at historical cost restated to current cost using the index of construction costs;
(c) NBV of long-lived assets restated at current cost using the index of construction costs (the facility was constructed the year before the first year of use);
(d) Current replacement cost; and
(e) Current liquidation value.
3. Which of the measures calculated in (2) above would you choose for (a) performance evaluation of each division manager, and (b) deciding which division is most profitable for the overall firm? What are the strategic advantages and disadvantages to the firm of each measure for both (a) and (b)?

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Problem Solving Process

A systematic approach to addressing and finding solutions for complex or challenging situations or issues.

Commodore

Commodore was a prominent company in the computer industry during the 1980s, best known for its line of personal computers like the Commodore 64.