Question 4 (7 marks)

Forklift Electrical Ltd

Income Statement Comparison

Current year Prior Year

(amounts in thousands)

Sales $ 33,750 $ 24,750

Cost of goods sold 21,938 16,830

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

The income statement for Forklift Electrical Ltd for two years are shown below:

Required:

a) Determine the operating income (loss) (dollars) for each year. (1 mark)

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. (1 mark)

c) Was the decision to invest additional assets in the company successful? Explain. (1 mark)

d) Assuming an 8% cost of capital, calculate the residual income for each year. (2 marks)

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. (2 marks)