The income statement for Forklift Electrical Ltd for two years is shown below

Required:

a) Determine the operating income (loss) (dollars) for each year.

b) The company made a strategic decision to invest in additional assets in the current year. These

amounts are provided. Using the amounts of the total assets as the investment base, calculate the return on investment.

c) Was the decision to invest additional assets in the company successful? Explain.

d) Assuming an 8% cost of capital, calculate the residual income for each year.

e) Would the management of Forklift Electrical Ltd have been more likely to accept the investment opportunity if the residual income had been used as a performance measure instead of ROI? Explain your answer.

SHOW YOUR WORKING

 

Sales Cost of goods sold Gross profit Wages Utilities Repairs Selling Total expenses Forklift Electrical Ltd Income Statement Comparison Current year (amounts in thousands) $ 33,750 21,938 $ 11,812 $ 8,775 675 169 506 $ 10,125 Prior Year Total assets (investment base) $ 4,500 $ 24,750 16,830 $ 7,920 $ 6,188 250 325 200 $ 6,963 $ 1,500