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7 pages/≈1925 words
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Accounting, Finance, SPSS
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Research Paper
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# Forklift Material Handling (Research Paper Sample)

Instructions:

The income statement of Forklift Material Handling shows the income statement for the current and prior year.
1. Determine the operating income (loss) (dollars) for each year
2. Determine their operating income percentage for each year.
3. The company made a strategic decision to invest in additional assets in the current year. These amounts are provided. Using the total assets amounts as the investment base, calculate the return on investment.
4. Was the decision to invest additional assets in the company successful? Explain.
5. Assuming an 8% cost of capital, calculate the residual income for each year. Explain how this compares to your findings in the previous year

source..
Content:

FORKLIFT MATERIAL HANDLING
Income Statement Corporation

Current Year

Prior Year

(Amount in thousands)

Sales

33,750

24,570

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

509

200

Total expenses

10,125

6,963

Operating income

1,687

957

Operating income %

5%

4%

Total assets
(investment base)

4,500

1,500

Return on investment

37%

64%

Residual income
(8% cost of capital)

1,322

837

The income statement of Forklift Material Handling shows the income statement for the current and prior year.
Operating income is the amount of profit a company is left with after deducting operating expenses from total revenue. Operating expenses include all costs associated with running the business such as wages and cost of goods sold. Operating income is also known as operating profit, and is sometimes referred to as EBITor Earnings before Interest and Taxes.
Operating Income = Gross Profit – Total Expenses
Current Year; \$11,812 – \$10,125 = \$1,687
Prior Year; \$7,920 - \$6,963 = \$957
Operating income percentage is the ratio of gross profit margin to sales for a business. This percentage shows how much profit from business activities is generated from every \$1 in sales after accounting for all operating expenses.
Operating Income % =
Current Year; = 5%
Prior Year; = 4%
Return on Investment =
Current Year; = 37%
Prior Year; = 64%
Rate of investment is the net gain or loss of an investment over a specified period of time expressed as a percentage of the investment cost. When making investment decisions using ROI, you need to consider the components of ROI i.e. operating income and cost of investment. The ROI for the current year is 37%. Looking at it in isolation, this is not a bad investment because it gives a positive ROI. But when compared to the prior year, it did not give as much as the ROI of prior year. Again, what we need to consider are the factors responsible for it. For instance; the breakdown of operating income (GrossProfit & Total Expenses). In the current year, there was an increase in sales but despite the increase, there was much more increase in COGS when compared to the prior year. It can be noted that the rate at which COGS increased is higher than the rate at which sales increased. In addition, there is an increase in overall expenses (asides repairs). All these put together have influenced the profitability. These are what give guidance in making investment decisions. On the other hand, ROI is not a very reliable way to make investment decisions. Return on Investment (or ROI) is a financial metric to evaluate the profitability of an investment. It tells you how much net income (“new money” from savings or from the realization of some benefit) you can generate from an investment (for example in a project to implement a new process, creation of new infrastructure, a new piece of software, etc)
One may be tempted to think that ROI is the same as profit but return on investment is not the same as profit margin. ROI focuses on the revenue invested in the company and the returns gained or lost on that investment based on the company’s net profit. ROI can be used to evaluate the efficiency of a company's pricing policies, inventory management and investment in capital assets. ROI is also a useful metric when a company wants to make a decision about major asset purchases, project financing and alterations in the investment portfolio.

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