Question

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 and that competition is fairly limited. The investment in assets (cash, inventory, equipment) required for the new location is $ 203 000 Minimum required return on investments 13% Actual 2019 return on investment of the original location 21% Management has provided the following income statement to the bank manager the expected net income in the next year. Static Budget Amount % Sales in Units 4 040 Sales 505 000 100% Less: Variable Costs: Cost of Goods Sold 221 000 44% Sales Commissions 50 500 10% Total Variable Costs 271 500 54% Contribution Margin 233 500 46% Less: Fixed Costs: Advertising 22 000 Property Taxes 10 000 Rent 43 000 Salaries & Wages 111 000 Total Fixed Costs 186 000 Net Operating Income 47 500 Part A (Chapter 11): Calculate the following performance measurements for the proposed Canmore expansion : Margin 56% Turnover Return on Investment Residual Income

Answer 1

Net operating Income	$               47,500
Divided By: Sales	$            505,000
Margin	9.405941%
Sales	$            505,000
Divided By: Average Operating assets	$            203,000
Turnover	2.487685
Margin	9.405941%
Multiply: Turnover	2.487685
Return on Investment	23.399015%
Average Operating assets	$            203,000
Multiply: Percentage minimum return required	13%
Minimum amount of net return required	$               26,390
Actual Net operating income	$               47,500
Less : Minimum amount of net return required	$               26,390
Residual Income	$               21,110