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 $21,938 $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 Required:. Assuming an 8% cost of capital, calculate the residual income for each year. 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.
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 $21,938 $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
Required:.
- Assuming an 8% cost of capital, calculate the residual income for each year.
- 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.
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