D B Question 4 - Performance Measurement (10 marks) E F The president feels very strongly that Mountain Sports should expand operations to a second location. She has even found a prime location in Canmore, Alberta, One of the great things about Canmore is its proximity to the mountains, and its only about 10 minutes away from this beautiful, vibrant and internationally known Banff tourist town. Research indicates that the Canmore market is well suited to both cross-country skis and bikes that competition is fairly limited The investment in assets (cash, inventory, equipment) required for the new location $ 208,000 5 Minimum required return on investments 1690 5 Actual 2019 return on investment of the original location 24% 7 B Management has provided the following income statement to the bank manager the expected net Static Budget % 9 Amount 10 Sales in Units 4,032 11 Sales 504,000 100% 12 Less: Variable Costs: 13 Cost of Goods Sold 219,000 43% 14 Sales Commissions 65 520 3% 15 Total Variable Costs 284 520 56% 16 Contribution Margin 219.480 44% 17 Less: Fixed Costs: 18 Advertising 23,000 19 Property Taxes 9,000 20 Rent 54,000 21 Salaries & Wages 112,000 22 Total Fixed Costs 198,000 23 Net Operating Income 21.480 Calibri Light B Till mu CH General 42 fr F G B C D E 3 Net Operating Income 21,480 4 5 Part A: (4 marks) Calculate the following performance measurements for the proposed Canmore expansion: 6 Margin 7 8 Turnover (use investment in assets in equation) 9 Return on Investment 1 2 Residual Income 3 4 Part B: Analysis (6 marks) Explain in your own words using case data. Marks will not be awarded for textbook definitions). a. If management is evaluated based on ROI, will the project be accepted (expansion into 5 Canmore)? Why or why not? 6 7 b. What is the major weak C36 B D E F 37 b. What is the major weakness of using return on investment as a performance measure? Is 38 there anything you could recommend to the owners to mitigate this weakness of using ROI 39 40 c. If management is evaluated based on residual income, will the expansion into Canmore be 41 accepted? Why or why not? 42 43 45 46 47 48