Name amp; ID Name amp; ID Accounting, Behaviour and Organisations Kilgors Hotels Division Case Kilgors Hotels Division owns hotels around Australia...

Name & ID	Name & ID

Accounting, Behaviour and Organisations

Kilgors Hotels Division Case

Kilgors Hotels Division owns hotels around Australia and Asia. Within Victoria, they have 3 rural spa retreats - the Western District Spa (Rural), the Southern Coastal Spa (Coastal) and the Northern Mountain Regional Spa (Mountain). The performance of each Spa’s manager is rewarded based on his/her ability to enhance annual return on investment. Each manager has the potential to be rewarded with an annual cash bonus based on the following scale.

Spa ROI (annual)	Bonus (as percentage of annual base income)
Under 20%	No bonus
20%<23%	2%
23%<26%	5%
26%<29%	8%
29%<33%	12%
33%<37%	17%
Above 37%	25%

Data relating to each Spa for the year 2016 is contained in the following table.

	RURAL	COASTAL	MOUNTAIN
Current assets	$ 1,350,000	$ 990,000	$ 1,900,000
Long-term assets	1,550,000	2,400,000	4,200,000
Current liabilities	170,000	130,000	980,000
Long term liabilities	690,000	20,000	85,000
Revenues	2,100,000	2,400,000	3,600,000
Variable operating costs	490,000	680,000	885,000
Fixed operating costs	630,000	470,000	970,000
Interest expense	175,000	5,000	1,000
Income tax expense (30%)	241,500	373,500	523,200

The manager of the Coastal Spa, Celeste O’Brien, is considering undertaking a renovation of her Spa in the coming financial year. The Spa has not been renovated for a number of years and is beginning to look a little out-of-date. Maintenance and repair costs have also been increasing, which is of particular concern to Celeste. If the renovation takes place it is expected that this will result in significant savings on repairs and maintenance for the next few years. It is also expected that the newly renovated Spa will be able to attract more guests than it currently does, even at higher room rates.

Celeste, along with her management accountant, has estimated the following projected costs and benefits of the renovation project, assuming a 5 year life and a required rate of return of 16%.

Additional investment in assets	$ 700,000
Annual repayments on long term loan	85,000
Annual Interest expense on long-term loan	35,000
Increase in average annual revenues	220,000
Average annual savings on repairs and maintenance costs	60,000

REQUIRED:

Calculate ROI, return on sales, investment turnover and manager bonuses using the following numerator and denominator.

	RURAL	COASTAL	MOUNTAIN
Numerator: EBIT Denominator: Total Assets ROI
Return on Sales
Investment Turnover
Manager Bonus Percentage

Which Spa manager appears to have performed the best?

Calculate ROI and manager bonuses using the following numerators and denominators.

	ROI
	RURAL	COASTAL	MOUNTAIN
Numerator: EBIT Denominator: Total Assets Copy from part a) Bonus
Numerator: EBIT Denominator: Total Assets less Current Liabilities Bonus
Numerator: NOPAT Denominator: Total Assets Bonus
Numerator: NOPAT Denominator: Total Assets less Current Liabilities Bonus

Which Spa manager appears to have managed ROI the best?

Calculate the Net Present Value (NPV) of the renovation project. Assume a 5 year life for the project and a required rate of return of 16%, with a discount factor of 3.274.

Assume the data provided in the table above stays the same (other than any impacts from undertaking the renovation project), determine the impact of the renovation project on annual ROI (EBIT/total assets) for the Coastal Spa. If you were Celeste O’Brien, earning an annual base salary of $150,000, would you renovate the Coastal Spa?

Calculate Residual Income for all Spas, using EBIT and Total assets. Assume Kilgors Hotel’s Division RRR is 16% p.a.

	RURAL	COASTAL	MOUNTAIN
Residual Income

Why might residual income be a better performance measure than ROI when evaluating Investment Centre/Manager performance?