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C F 9 A B D E 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 that competition is 3 fairly limited 4 The investment in assets (cash, inventory, equipment) required for the new location is $ 206,000 5 Minimum required return on investments 18% 6 Actual 2019 return on investment of the original location 24% 7 8 Management has provided the following income statement to the bank manager the expected net income in the next Static Budget % Amount 10 Sales in Units 4,048 11 Sales 506,000 100% 12 Less: Variable Costs: 13 Cost of Goods Sold 216,000 43% 14 Sales Commissions 55,660 11% 15 Total Variable Costs 271,660 54% 16 Contribution Margin 234,340 46% 17 Less: Fixed Costs: 18 Advertising 21,000 19 Property Taxes 9,000 20 Rent 42,000 21 Salaries & Wages 108,000 22 Total Fixed Costs 180,000 23 Net Operating Income 54,340 24 24 25 Part A: (4 marks)Calculate the following performance measurements for the proposed Canmore expansion: 26 Margin 11% 27 2.5 28 Turnover (use investment in assets in equation) 29 26% 30 Return on Investment 31 32 Residual Income 17,260 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 or why 35 not? The project will be accepted because based on ROI, the return on investment is higher than the actual return. Questions - 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): 1. Beginning cash balance invested by owners $ 55,000 Quarter 1 Quarter 2 Quarter 3 Quarter 4 2. Sales by quarteras % of total projected sales) 23% 25% 26% 26% 3. Type of collections from customers Cash Sales 44% 56% Credit Sales (accounts receivable) Cash sales are collected in the quarter of the sale, all credit sales are collected in the quarter after the sale. 4. Merchandise purchases Merchandise purchases (cost of goods sold) are all paid in the quarter following purchase. (Quarter 1 purchases are bought in Quarter 1 but paid for in quarter 2). 5. Operating expenses All other operating expenses (all expenses except cost of goods sold) are paid on a monthly basis. 6. Required investment equipmentaid in cash in the first quarter 131,000 $ S 8,000 7. Quarterly income tapayments paid in cash 8. Minimum cash balance $ 25,000 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 and payments are made in increments of $1,000. Interest on borrowing can be ignored. Required Prepare a cash budget for the first year of operation in Canmore by quarter and in total. Show clearly on your budget ti quarter(s) In which borrowing will be needed and the quarter(s) in which repayments can be made, as requested by the company Required:Prepare a cash budget for the first year of operation in Canmore by quarter and in total. Show clearly on your budgetti Name Box which borrowing will be needed and the quarter(s) In which repayments can be made, as requested by the compan bank. Mountain Sports Cash Budget For the year ended December 31st . Quarter Year 5 1 2 3 4 Summary 5 Percent of Sales 239 25%6 26% 26% 100% Estimated Sales $116,380 $126,500 $131,560 $131,560 $506,000 ING To Re cas Ca 4. dis CASH BALANCE, Beginning $ 55,000 Collections from customers: Cash Sales 2 Credit Sales CASH AVAILABLE Less: Cash Payments Merchandise purchases (COGS) Sales Commissions 3 Advertising Property Taxes Rent Salaries & Wages Equipment Purchase 1 2 Income tax Installment B Total Disbursements Cash Excess (Deficiency) Financing (Note 1) 5 Borrow Repayment of Principal (show as A B E F Cash Excess (Deficiency) Financing (Note 1) Borrow Repayment of Principal (show as negative) Net Financing Cash Balance, Ending 0 0 0 0 Note 1: Financing Calculations Cash excess (Deficiency) Minimum cash balance Amount to borrow (repay) Borrowing (Repayments) Rounded to Increment of $1,000 C F 9 A B D E 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 that competition is 3 fairly limited 4 The investment in assets (cash, inventory, equipment) required for the new location is $ 206,000 5 Minimum required return on investments 18% 6 Actual 2019 return on investment of the original location 24% 7 8 Management has provided the following income statement to the bank manager the expected net income in the next Static Budget % Amount 10 Sales in Units 4,048 11 Sales 506,000 100% 12 Less: Variable Costs: 13 Cost of Goods Sold 216,000 43% 14 Sales Commissions 55,660 11% 15 Total Variable Costs 271,660 54% 16 Contribution Margin 234,340 46% 17 Less: Fixed Costs: 18 Advertising 21,000 19 Property Taxes 9,000 20 Rent 42,000 21 Salaries & Wages 108,000 22 Total Fixed Costs 180,000 23 Net Operating Income 54,340 24 24 25 Part A: (4 marks)Calculate the following performance measurements for the proposed Canmore expansion: 26 Margin 11% 27 2.5 28 Turnover (use investment in assets in equation) 29 26% 30 Return on Investment 31 32 Residual Income 17,260 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 or why 35 not? The project will be accepted because based on ROI, the return on investment is higher than the actual return. Questions - 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): 1. Beginning cash balance invested by owners $ 55,000 Quarter 1 Quarter 2 Quarter 3 Quarter 4 2. Sales by quarteras % of total projected sales) 23% 25% 26% 26% 3. Type of collections from customers Cash Sales 44% 56% Credit Sales (accounts receivable) Cash sales are collected in the quarter of the sale, all credit sales are collected in the quarter after the sale. 4. Merchandise purchases Merchandise purchases (cost of goods sold) are all paid in the quarter following purchase. (Quarter 1 purchases are bought in Quarter 1 but paid for in quarter 2). 5. Operating expenses All other operating expenses (all expenses except cost of goods sold) are paid on a monthly basis. 6. Required investment equipmentaid in cash in the first quarter 131,000 $ S 8,000 7. Quarterly income tapayments paid in cash 8. Minimum cash balance $ 25,000 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 and payments are made in increments of $1,000. Interest on borrowing can be ignored. Required Prepare a cash budget for the first year of operation in Canmore by quarter and in total. Show clearly on your budget ti quarter(s) In which borrowing will be needed and the quarter(s) in which repayments can be made, as requested by the company Required:Prepare a cash budget for the first year of operation in Canmore by quarter and in total. Show clearly on your budgetti Name Box which borrowing will be needed and the quarter(s) In which repayments can be made, as requested by the compan bank. Mountain Sports Cash Budget For the year ended December 31st . Quarter Year 5 1 2 3 4 Summary 5 Percent of Sales 239 25%6 26% 26% 100% Estimated Sales $116,380 $126,500 $131,560 $131,560 $506,000 ING To Re cas Ca 4. dis CASH BALANCE, Beginning $ 55,000 Collections from customers: Cash Sales 2 Credit Sales CASH AVAILABLE Less: Cash Payments Merchandise purchases (COGS) Sales Commissions 3 Advertising Property Taxes Rent Salaries & Wages Equipment Purchase 1 2 Income tax Installment B Total Disbursements Cash Excess (Deficiency) Financing (Note 1) 5 Borrow Repayment of Principal (show as A B E F Cash Excess (Deficiency) Financing (Note 1) Borrow Repayment of Principal (show as negative) Net Financing Cash Balance, Ending 0 0 0 0 Note 1: Financing Calculations Cash excess (Deficiency) Minimum cash balance Amount to borrow (repay) Borrowing (Repayments) Rounded to Increment of $1,000