Hi there!

Actually there are two questions. Question 4 is solved but some of its part will be used in question 5(which I wants to be solved). Please solve question 5 only. Thank you.

Question 4 - Performance Measurement (10 marks) 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 The investment in assets (cash, inventory, equipment required for the new location $ 212,000 Minimum required return on investments 16% Actual 2019 return on investment of the original location 20% 8 Management has provided the following income statement to the bank manager the expected net Static Budget % 9 Amount 10 Sales in Units 4,224 11 Sales 528,000 100% 12 Less: Variable Costs: 13 Cost of Goods Sold 216,000 41% 14 Sales Commissions 63 360 12% 15 Total Variable Costs 279,360 53% 16 Contribution Margin 248,640 47% 17 Less: Fixed Costs: 18 Advertising 26,000 19 Property Taxes 10,000 20 Rent 48,000 21 Salaries & Wages 109,000 193,000 22 Total Fixed Costs 55,6401 23 Net Operating Income Part A: (4 marks) Calculate the following performance measurements for the proposed Canmore expansion 26 Margin 1196 27 2.5 28 Turnover (use investment in assets in equation) 29 Return on Investment 26% 30 31 32 Residual Income $ 21,720 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 35 Canmore)? Why or why not? Based on ROI evaluation, the project will be accepted because the return on investment on the new project (26%) is higher than the actual 2019 return on investment(20%). b. What is the major weakness of using return on investment as a performance measure? Is there 38 anything you could recommend to the owners to mitigate this weakness of using ROI as a In this case, if the return on investments is the only factor considered, than it must be noted that company's debt would be increased and if the expectation fails due to some uncontrollable conditions like changes in climate than the business would be closed but the cost will be increased by very high rate. So, all other factors must also be looked before getting to any decision. 39 40 c. If management is evaluated based on residual income, will the expansion into Canmore be 41 accepted? Why or why not? Based on residual income, the project will be accepted because the residual income is positive after considering the cost of capital on the operating assests deployed for the project. 42 1 2 Question 5 - Cash Budget (30 marks) 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. Management has provided the following list of assumptions to help in the preparation of the cash budget (note: you will need to use the projected income statement provided in Question 4 to complete the cash budget): 3 45678 1. Beginning cash balance invested by owners $ 52,000 23% Quarter 1 Quarter 2 Quarter 3 Quarter 4 2. Sales by quarter (as % of total projected sales) 9 30% 20% 27% 10 11 3. Type of collections from customers 12 Cash Sales 40% 13 receivable) 60% 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 18 are bought in 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 in equipment paid in cash in the first 23 quarter $ 133,000 24 25 7. Quarterly income tax payments paid in cash 8,000 26 27 8. Minimum cash balance $ 25,000 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 30 quarter. All borrowing and payments are made in increments of $1,000. Interest on borrowing can be ignored. 31 Required: Prepare a cash budget for the first year of operation in Canmore by quarter and in total. Show clearly on your budget the quarter(s) in which borrowing will be needed and the quarter(s) in which repayments can be made, as requested by the company's bank. 33 34 35 36 Percent of Sales 37 Estimated Sales 38 Mountain Sports Cash Budget For the year ended December 31st Quarter 2 3 30% 20% 2796 $158,400 $105,600 $142,560 41 23% Year Summary 100% $528,000 $121,440 39 CASH BALANCE, Beginning S 52,000 40 Collections from customers: 41 Cash Sales 42 Credit Sales 43 CASH AVAILABLE 44 Less: Cash Payments 45 Merchandise purchases (COGS) B D E F 46 Sales Commissions 47 Advertising 48 Property Taxes 49 Rent 50 Salaries & Wages 51 Equipment Purchase 52 Income tax Installment 53 Total Disbursements 54 Cash Excess (Deficiency) 55 Financing (Note 1) 56 Borrow Repayment of Principal Ishow as negative) 57 B D E 53 Total Disbursements 54 Cash Excess (Deficiency) 55 Financing (Note 1) 56 Borrow Repayment of Principal (show as negative) 57 58 Net Financing 59 Cash Balance, Ending 60 61 Note 1: Financing Calculations (you may use the space below to assist in your calculations). 62 Cash excess (Deficiency) 0 63 Minimum cash balance Amount to borrow (repay) 64 Borrowing (Repayments) 65 Rounded to increment of $1,000 66 67