The income statement for Forklift Electrical Ltd for two years are shown below:
Forklift Electrical Ltd
Income Statement Comparison
Current year
Prior Year
(amounts in thousands)
Sales $ 33,750 $ 24,750 Cost of goods sold
21,93816,830
Gross profit 11,812 $ 7,920
Wages $ 8,775 $ 6,188
Utilities 675 250 Repairs 169 325
Selling
506
200
Total expenses $ 10,125 $ 6,963
Total assets (investment base) $ 4,500 $ 1,500
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 the working please (all the steps)