Question

Fatima Hopkins, the CEO of Central Adventures, is having difficulties with all three of her top management level employees. With one manager making questionable decisions, another threatening to leave, and the third likely ‘in the red’, Fatima is hoping there is a simple answer to all her difficulties, and needs some advice from her accountant on how to proceed.

Central Adventures owns and operates three amusement parks in Michigan: Central Funland, Central Waterworld, and Central Treetops. Central Adventures has a decentralized organizational structure, where each park is run as an investment center. Each park manager meets with the CEO at least once annually to review their performance, as measured by their park’s ROI. The park manager then receives a bonus equal to 10% of their base salary for every ROI percentage point above the required rate.

Central Funland is an outdoor theme park, with twelve roller coaster rides and several other attractions. This park has first opened 1965, and most of the rides have been in operation for 20+ years. Attendance at this park has been relatively stable over the past ten years. The park manager of Funland, Janet Lieberman, recently shared with Fatima a proposal to replace one of their older rides with a new roller coaster, a hybrid steel and wood rollercoaster with a 90 degree, 200 foot drop and three inversions. The proposal indicated that the ride would cost $8,000,000 with an estimated life of 20 years. In addition, this new style of coaster would require additional maintenance, costing $125,000 each year. However, it projected that this new attraction would boost attendance, earning the park an additional $1,190,000 per year in revenues. Janet ultimately decided not to invest in this new attraction.

Central Waterworld is an indoor water park, operating year-round. Run by park manager David Copperfield, Waterworld was built in 2016 and has increased attendance by 20% every year since. David recently sent you an email complaining that, based on the current bonus payout schedule, Janet Lieberman’s bonus last year was significantly higher than his. He points to the increasing attendance, and says that his park is being punished for having opened so recently (his park assets are much more recent than the roller coasters at Funland). He currently has an employment offer from another company at the same pay rate, which he says he will accept if his performance is not appropriately acknowledged.

Central Treetops includes a high ropes course and has a series of ziplines that criss-cross over the Chippewa River. For many years, it was a popular venue for corporate team-building activities, so it is equipped with a main indoor facility with cafeteria and overnight guest rooms. This park has lost popularity in recent years, and has been ‘in the red’ for the past two years. If the park is not profitable this year, you will need to decide whether to close it - permanently. Central Adventures has a $86,000 mortgage payment on the land and buildings for Treetops, which would still need to be paid if the park is closed. Incidentally, you recently had a conversation with the regional head of the YMCA, who would like to open a summer camp in the central Michigan region. If you decided to close Treetops, you are fairly certain that you could lease that land to the YMCA for $250,000 annually.

A partial report of this year’s financial results for Central Adventures shows the following:

	Funland	Waterworld	Treetops
Sales	$59,460,690	$10,913,500	$1,965,600
# of tickets sold	1,564,755	419,750	30,240
# of employees	540	200	32
Average net operating assets	$21,065,000	$13,452,000	$420,000
Gross margin	$18,135,510	$3,601,455	$1,022,112
Selling and administrative costs	$13,259,520	$944,620	$231,900

In addition to the information above, there are $2,542,920 in corporate costs, which are currently allocated evenly between the three parks. These costs are primarily due to employee benefits costs, which are billed at the corporate level. If the Treetops park is closed, the allocated corporate costs would decrease by $12,000. Central Adventures has a required rate of return of 12 percent (set at the company’s weighted-average cost of capital) and are subject to 18% income taxes.

Fatima needs to see this year’s performance results before she can make any decisions. Is David’s complaint about the performance evaluation metrics valid? Is that also affecting management decisions in the form of Janet’s rejection of the proposed new rollercoaster? And is the company better off without Treetops? She sets off to the company accountant’s office to help get some answers.

Answer 1

Current position of central Adventures

Particulars	funland	waterworld	treetops
Sales	59460690	10913500	1965600
Gross margin	18135510	3601455	1022112
Selling &distribution cost	13259520	944620	231900
Corporate cost (Evenly distributed)	847640	847640	847640
Net margin	4028350	1809195	(57428)

Rate of return 6.77% 16.58%. Nil

(Net margin to sale

Ratio)

Required rate of return (given) = 9.84%

(After tax)

In individual cases

return from funland is low compare to required return

While waterworld gives more return

In overall return from combine position is 7.99%

5780117 / 72339790

Therefore combine performance gives less return than require rate of return.

Evaluation of janet' rejection of the proposed new rollercoaster

Particulars	funland
Sales	60650690
Gross margin (note)	18498460
Selling & administration cost	13259520
Corporate cost	847640
Additional maintenance cost	125000

Net margin

4266300

Rate of return = 7.03% (4266300/ 60650690)

Rate of return increase from 6.77%

Therefore proposed new rollercoaster gives higher return compare to 6.77%

Note:- gross margin

60650690* 30.50% = 18498460

Gross margin rate = 18135510/ 59460690 = 30.50%

Yes the company better off without treetops as it give negative results and because of this combine rate of return reduces.

As it's better to receive lease rent 250000$ annually.