Fatima Hopkins, the CEO of Central Adventures, is having difficulties with all three of her top management level employees. With one manager making questionable decisions, another threatening to leave, and the third likely in the red, Fatima is hoping there is a simple answer to all her difficulties. She is asking you (her accountant) for some advice on how to proceed.

Central Adventures owns and operates three amusement parks in Michigan: Funland, Waterworld, and Treetops. Central Adventures has a decentralized organizational structure, where each park is run as an investment center. Park managers meet with the CEO at least once annually to review their performance, where each park managers performance is measured by their parks return on investment (ROI). The park manager then receives a bonus equal to 10% of their base salary for every ROI percentage point above the cost of capital.

Fatimas first difficulty is with the Funland park. Funland is an outdoor theme park, with twelve roller coaster rides and several other attractions. This park has first opened 1965, and most of the rides have been in operation for over 20 years. Attendance at this park has been relatively stable over the past ten years. The park manager of Funland, Janet Lieberman, recently shared with Fatima a proposal to replace one of their older rides with a new roller coaster, a hybrid steel and wood roller coaster with a 90 degree, 200 foot drop and three inversions. The proposal indicated that the ride would cost $6,483,320 with an estimated life of 20 years and no salvage value. In addition, this new style of coaster would increase maintenance and insurance costs for the park by $261,020 each year. However, it projected that this new attraction would boost attendance, earning the park an additional $1,100,300 per year in revenues. Janet ultimately decided not to invest in this new attraction. Fatima (doing a quick mental calculation) saw that the investment had a payback period of eight yearsmuch shorter than the life of the roller coasterand is perplexed at Janets decision.

The second dilemma concerns the Waterworld park. Waterworld is an indoor water park, operating year-round. Run by park manager David Copperfield, Waterworld was built in 2016 and has increased attendance by 20% every year since. David recently sent you an email complaining that, based on the current bonus payout schedule, Janet Liebermans bonus last year was significantly higher than his. He points to the increasing attendance, and says that his park is being punished for having opened so recently (his park assets are much more recent than the roller coasters at Funland). He currently has an employment offer from another company at the same base pay rate, which he says he will accept if his performance is not appropriately acknowledged. Fatima needs to look at the relative performance across parks to determine how to proceed with David.

Central Treetops includes a high ropes course and has a series of ziplines that criss-cross over the Chippewa River. For many years, it was a popular venue for corporate team-building activities, so it is equipped with a main indoor facility with cafeteria and overnight guest rooms. This park has lost popularity in recent years, and has been in the red for the past two years. If the park is not profitable this year, you will need to decide whether to close it - permanently. Included in the Fixed COGS for Treetops is an annual $112,860 mortgage payment on the land and buildings for the park, which would still need to be paid by Central Adventures if the park is closed. Incidentally, you recently had a conversation with the regional head of the YMCA, who would like to open a summer camp in the central Michigan region. If you decided to close Treetops, you are fairly certain that you could lease that land to the YMCA for $250,000 annually.

A partial report of this years financial results for Central Adventures shows the following:

	Funland	Waterworld	Treetops
Sales	$65,328,521	$11,857,938	$1,927,800
Fixed COGS	$1,356,850	$6,284,530	$159,430
Variable COGS	$40,257,310	$2,040,695	$698,928
# of tickets sold	1,564,755	419,750	30,240
# of employees	540	200	32
Average net operating assets	$29,014,000	$19,252,000	$420,000
Selling and admin costs	$3,259,520	$944,620	$231,900

The Selling and administrative costs are all incurred directly by each park, and are determined at the beginning of each year (that is, they do not change with the number of tickets sold). In addition to the divisional information above, there are $1,865,335 in corporate costs that are currently allocated evenly between the three parks. These costs are primarily due to employee benefits costs, which are billed at the corporate level. If the Treetops park is closed, the decreased employee base would reduce allocated corporate costs by $466,580. Central Adventures has a cost of capital of 12 percent (and Fatima uses the cost of capital as their required rate of return) and are subject to 32% income taxes.

Fatima needs to evaluate this years performance results before she can make any decisions. Is the company better off without Treetops? Is Davids complaint about the performance evaluation metrics valid? And is the depreciated asset base at Funland also affecting management decisions in the form of Janets rejection of the proposed new rollercoaster? Fatima sets off to the company accountants office to get some answers.

Required:

Write your response in the form of a 1-2 page memo to Fatima Hopkins, from the perspective of the company accountant. Be sure to include all the financial analyses to support your conclusions, clearly showing your calculations, at the end of the memo or attached in a separate document. Be sure to address the following points in your memo.

a. Provide an evaluation of this years performance results include a segmented income statement for Central Adventures, as well as the current annual ROI, residual income and EVA for the three parks.

b. Evaluate Funlands decision not to invest in the new rollercoaster (i.e., was the decision appropriate and in the best interests of Central Adventures).

c. Evaluate the validity of David Copperfields (the Waterworld park manager) complaint regarding performance metrics. Explain why it is (or is not valid), and what further information would be necessary.

d. Provide a recommendation on whether to close Treetops.