1 Question 4 - Performance Measurement (10 marks) 2 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 3 and that competition is fairly limited. 4 The investment in assets (cash, inventory, equipment) required for the new location is $ 213,000 5 Minimum required return on investments 13% 6 Actual 2019 return on investment of the original location 21% 7 8 Management has provided the following income statement to the bank manager the expected net income in Static Budget % 9 Amount 10 Sales in Units 4,240 11 Sales 530,000 100% 12 Less: Variable Costs: 13 Cost of Goods Sold 218,000 14 Sales Commissions 63,600 12% 15 Total Variable Costs 281,600 53% 16 Contribution Margin 248,400 47% 17 Less: Fixed Costs: 18 Advertising 22,000 19 Property Taxes 9,000 20 Rent 46,000 21 Salaries & Wages 103,000 22 Total Fixed Costs 180,000 23 Net Operating Income 68.400 24 25 Part A (Chapter 11):Calculate the following performance measurements for the proposed Canmore expansion (4 marks): 26 Margin 13% 27 41% 2.5 28 Turnover (use investment in assets in equation) 29 32% 30 Return on Investment 31 32 Residual Income $ 40,710 33 34 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 Canmore)? Why Chinat Q4 Performance Measurement Q5 Cash Budget Q6 Variance Analysis Ready 1 Question 5 - Cash Budget (30 marks) 2 Assume that the five owners of Mountain Sports Ltd. decide to collectively invest personal funds into the Canmore expansion (this is a continuation of question 4). Mountain Sports will require an open line of credit up to a maximum of $350,000. It will be necessary to convince the bank manager of this new Canmore branch ability to repay its line credit plus interest within a year. 3 Management has provided the following list of assumptions to help in the preparation of the cash budget (note: you will need to 4 use the projected income statement provided in Question 4 to complete the cash budget): 5 6 1. Beginning cash balance invested by owners $ 51,000 7 8 Quarter 1 Quarter 2 Quarter 3 Quarter 4 9 2. Sales by quarter(as % of total projected sales) 21% 25% 23% 31% 10 11 3. Type of collections from customers 12 Cash Sales 45% 13 Credit Sales (accounts receivable) 55% 14 15 Cash sales are collected in the quarter of the sale, all credit sales are collected in the quarter after the sale. 16 17 4. Merchandise purchases Merchandise purchases (cost of goods sold) are all paid in the quarter following purchase. (Quarter 1 purchases are bought in 18 Quarter 1 but paid for in quarter 2). 19 20 5. Operating expenses 21 All other operating expenses (all expenses except cost of goods sold) are paid on a monthly basis. 22 6. Required investment equipmentpaid in cash in the first quarter 23 $ 138,000 24 25 7. Quarterly income taxpaymentspaid in cash $ 8,000 26 27 8. Minimum cash balance $ 29,000 28 29 9. Borrowing and Repayments Any borrowing will take place on the first day of the quarter and any repayments are paid at the end of the quarter. All borrowing 30 and payments are made in increments of $1,000. Interest on borrowing can be ignored. 31 Required:Prepare a cash budget (Chapter 10) for the first year of operation in Canmore by quarter and in total. Show clearly o your budget the quarter(s) in which borrowing will be needed and the quarter(s) in which repayments can be made, as reques by the company's bank. 32 Required:Prepare a cash budget (Chapter 10) for the first year of operation in Canmore by quarter and in total. Show clearly o your budget the quarter(s) in which borrowing will be needed and the quarter(s) in which repayments can be made, as reques by the company's bank. 32 33 Quarter Year 34 1 2 3 35 Percent of Sales 21% 25% 23% 31% 100% 36 Estimated Sales $111,300 $132,500 $121,900 $164,300 $530,000 37 4 Summary Note from Instructor: Total sales amount taken from question 4. Remember to refer to question 4 as this cash| budget is a continuation of the Canmore expansion introduced in Question 4. This will be important for the cash disbursements as well! 38 CASH BALANCE, Beginning $ 51,000 39 Collections from customers: 40 Cash Sales 41 Credit Sales 42 CASH AVAILABLE 43 Less: Cash Payments 44 Merchandise purchases (COGS) 45 Sales Commissions 46 Advertising 47 Property Taxes 48 Rent 49 Salaries & Wages 50 Equipment Purchase 51 Income tax Installment 52 Total Disbursements 204,356 564,020 53 Cash Excess (Deficiency) -103,271 54 Financing (Note 1) 55 133,000 Borrow Repayment of Principal (show as negative) 56 -30,000 57 Net Financing 103,000 39 Collections from customers: 40 Cash Sales 41 Credit Sales 42 CASH AVAILABLE 43 Less: Cash Payments 44 Merchandise purchases (COGS) 45 Sales Commissions 46 Advertising 47 Property Taxes 48 Rent 49 Salaries & Wages 50 Equipment Purchase 51 Income tax Installment 52 Total Disbursements 204,356 564,020 53 Cash Excess (Deficiency) -103,271 54 Financing (Note 1) 55 133,000 Borrow Repayment of Principal (show as negative) 56 -30,000 57 Net Financing 103,000 $ 29,615 58 Cash Balance, Ending 59 60 Note 1: Financing Calculations 61 Cash excess (Deficiency) 62 Minimum cash balance 63 Amount to borrow (repay) -103,271 35,889 35,491 47,615 Borrowing (Repayments) Rounded 64 to increment of $1,000 65