Question 4 - Performance Measurement (8 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 fairly limited. 3 4 The investment in assets (cash, inventory, equipment) required for the new location is $ 1,74,000 5 Minimum required return on investments 16% 6 Actual 2019 relum on investment of the original location 17% 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 4,208 11 Sales 5,26,000 100% 12 Less: Variable Costs: 13 Cost of Goods Sold 2,23,000 42% 14 Sales Commissions 78,900 15% 15 Total Variable Costs 3,01,900 57% 16 Contribution Margin 2,24,100 43% 17 Less: Fixed Costs: 18 Advertising 21,000 19 Property Taxes 10,000 20 Rent 41,000 21 Salaries & Wages 1,03,000 22 Total Fixed Costs 1.75,000 23 Net Operating Income 49.100 24 B D E 4 25 Part A: (4 marks) Calculate the following performance measurements for the proposed Canmore expansion 26 Margin (see Chapter 11 notes) 27 28 Turnover (use investment in assets in equation) 29 30 Return on Investment 31 32 Residual Income 33 Part B: Analysis (4 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)? 5 Why or why not? 36 37 b. If management is evaluated based on residual income, will the expansion into Canmore be accepted? Why or why not? 39