V. Question 3 ROI, Residual Income NOTE: This is a new question. Do not use the information from Questions 1 and 2. a. Management is evaluated based on return on investment and is wondering if they should expand into Canmore. If the company's current return on investment is 24%, would management accept the new project (expansion into Canmore)? Why or why not? Explain your answer in your own words. The president feels very strongly that Mountain Sports should expand operations to a secon location. She has even found a prime location in Canmore, Alberta, One of the great things about Canmore is its proximity to the mountains, ski-areas, hiking, biking and only about 10 m this beautiful, vibrant and internationally known Banff tourist town. Research indicates that the Canr market is well suited to both cross-country skis and mountain bikes and that competition is fairly lim V. Question 3 ROI, Residual Income (continued) Performance Measurements: ROI, Residual (RI) b. What is the major weakness of using retum on investment as a performance meas- ure? Explain your answer in your own words using case facts. Management has provided the following income statement to the bank manager the expected net income in the next year, c. If management is evaluated based on residual income, would they be inclined to ac- cept the project. Why or why not? Explain your answer in your own words. S 1,311,000 $ 897,000 115,000 1,012,000 299,000 $ Sales Variable Costs: Cost of Goods Sold Sales Commissions Total Variable Costs Contribution Margin Fixed Costs: Lease Salaries Advertising Property Taxes Utilities Total Fixed Costs Operating Income S 86,250 115,000 23,000 8,050 9,200 $ 241.500 57.500 Part A: (record responses below-show all calculations) Using the above projected income statement, calculate the following performance measures for the proposed Canmore expansion: ROI, return on investment (Note: Average operating assets are $253,000) RI, residual income (14% is considered an appropriate return) Part B: (record responses below) Analysis of Performance