Case Study Extension: VitalJuice Ltd. – The Next Step in Growth
In the previous case study, VitalJuice Ltd. faced critical financial decisions as they navigated their first years of growth. With their flagship product, “Elixir Vitality,” gaining recognition in the health beverage industry, the company successfully expanded operations, increasing their sales revenue and exploring options for both local and international growth. They utilized financial tools such as the Profit and Loss account to track their performance, determine tax liabilities, and make informed decisions on dividends, all while balancing their expansion and financial strategies.
New Investment: High-Tech Juice Presser
As part of their aggressive global expansion, VitalJuice Ltd. has made a significant investment in a state-of-the-art, high-pressure juice presser. This new machine, which will be used to produce large volumes of juice more efficiently, has been purchased to streamline production at their new, advanced facility. This addition aligns with their growing demand in international markets, especially as they expand into North America, Europe, and Asia. The company believes this investment will allow them to keep up with rising production needs and maintain high-quality standards for their product.
However, the company’s CFO is particularly focused on ensuring that the depreciation of this new asset is accurately calculated, as the company will use this machine for years to come. This is an important task to ensure that the financial statements remain clear, accurate, and well-managed over the next five years.
Key Details of the New Juice Presser
- Cost of the Asset: $150,000
- Residual Value: $10,000 (the estimated resale value of the machine after 5 years)
- Useful Life: 5 years (based on the company’s expected use and asset lifespan)
The machine will press fruit each year, and the following kilos of fruit are expected to be processed annually:
- Year 1: 50,000 kilos
- Year 2: 80,000 kilos
- Year 3: 120,000 kilos
- Year 4: 90,000 kilos
- Year 5: 60,000 kilos
Given these numbers, the CFO would like to calculate depreciation using two methods:
- Straight-Line Depreciation
- Units of Production Depreciation
Questions for Students:
Q1. Calculate the annual depreciation using the straight-line method.
Q2. Calculate the depreciation for each year using the units of production method.
Q3. Explain how each depreciation method could impact VitalJuice Ltd.’s financial statements and tax liabilities.
Q4. Explain which depreciation method might be more suitable for VitalJuice’s new juice presser, considering the company’s expected usage patterns.