V. Question 3 ROI, Residual Income NOTE: This is a new question. Do not use the information from Questions 1 and 2. The president feels very strongly that Mountain Sports should expand operations to a second location. S 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 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 mountain bikes and that competition is fairly limited. Performance Measurements: ROI, Residual (RI) Management has provided the following income statement to the bank manager the expected net income in the next year. $ 1,425,000 $ 975,000 125,000 $ 1,100,000 325,000 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 93,750 125,000 25,000 8,750 10,000 $ 262,500 62,500 Part A: (record responses below - show all calculations) Using the above projected income statement, calculate the following performance measurements for th proposed Canmore expansion: ROI, return on investment (Note: Average operating assets are $253,000) RI, residual income (14% is considered an appropriate return) me 37% D Sun 1:34 PM S U - ACCT1117 Managerial Accounting C.. Qu Search in Document Insert Draw Design Layout References Mailings Review View 2+ Share 12 A+ A- A A E + A B I U . X, X? A: A. E = = = 1. . . Styles Styles ROI, return on investment (Note: Average operating assets are $253,000) Arial Pane RI, residual income (14% is considered an appropriate return) Part B: (record responses below) Analysis of Performance 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 23%. would management accept the new project (expansion into Canmore)? Why or why not? Explain your answer in your own words. Page 8 of 11 Return on Investment can used in in computing the percentage of profit that the company will expect in expanding their business in a specific place. In this situation, the ROI is expecting a 24.70% of return when they expand in Canmore that means it is favorable choice that is higher that their current 23%. V. Question 3 ROI, Residual Income (continued) b. What is the major weakness of using return on investment as a performance measure? Explain your answer in your own words using case facts. G. I management is evaluated based on residual income, would they be inclined to accept the project. Why or why not? Explain your answer in your own words. ge 8 of 11 1901 words English (United States)