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 sold21,938 16,830

Gross profit 11,812 $ 7,920

Wages$ 8,775 $6,188

Utilities675250

Repairs169 325

Selling506 200

Total expenses 10,125$6,963

Total assets (investment base) $4,5001,500

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, calculatethe 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 theinvestment opportunity if the residual income had been used as a performance measure instead of ROI? Explain your answer.

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