Reference no: EM131787403

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.