Return on Investment and Residual Income
The financial results for the past two years for Ornamental Iron, a division of Iron Horse Company, follow.
| Iron Horse Company |
| Ornamental Iron Division |
| Balance Sheet |
| December 31 |
| This Year |
Last Year |
| Assets |
| Cash |
$ 5,000 |
$ 3,000 |
| Accounts receivable |
10,000 |
8,000 |
| Inventory |
30,000 |
32,000 |
| Other current assets |
600 |
600 |
| Plant assets |
128,300 |
120,300 |
| Total assets |
$173,900 |
$163,900 |
| Liabilities and Stockholders' Equity |
| Current liabilities |
$ 13,900 |
$ 10,000 |
| Long-term liabilities |
90,000 |
93,900 |
| Stockholders' equity |
70,000 |
60,000 |
| Total liabilities and stockholders' equity |
$173,900 |
$163,900 |
| Iron Horse Company |
| Ornamental Iron Division |
| Income Statement |
| For the Years Ended December 31 |
| This Year |
Last Year |
| Sales |
$ 180,000 |
$ 160,000 |
| Cost of goods sold |
(100,000) |
(90,000) |
| Selling and administrative expenses |
(27,500) |
(26,500) |
| Operating income |
$ 52,500 |
$ 43,500 |
| Income taxes |
17,850 |
14,790 |
| After-tax operating income |
$ 34,650 |
$ 28,710 |
1. Compute the division's profit margin, asset turnover, and return on investment for this year and last year. Beginning total assets for last year were $157,900. Round to two decimal places.
2. The desired return on investment for the division has been set at 12 percent. Compute the division's residual income for this year and last year.
3. The cost of capital for the division is 8 percent. Compute the division's economic value added for this year and last year.