Enager Industries, Inc. |
Case on Management Control System |
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Case Context:
Enager Industries, Inc. was a relatively young company, which had grown rapidly to its 1993 sales level of over $222 million. (See Exhibits 1 and 2 for financial data for 1992 & 1993). The company has three divisions which were treated as independent companies because of their differing nature of activities.
The corporate office of Enager consists only of few managers and staff. The function of the corporate unit is to coordinate the activities of the three divisions. One aspect of this coordination was to that all new project proposals requiring investment in excess of ...view middle of the document...
This is to be able to relate each division’s profit to the assets used to generate its profits.
Criteria or Measure by Which Performance Was Appraise
* Return on Assets (ROA)
Each division is measured based on its return on assets (ROA) which was defined to be the division’s net income divided by its total assets. Net income was calculated by taking the division’s direct income before taxes, the subtracting the share of corporate administrative expenses (allocated on the basis of divisional revenues) & its share of income tax expense. This method made the sum of divisional expenses equal to the corporate expenses. Assets are also subdivided among three divisions, attributing assets to divisions that use them. The corporate-office assets were also allocated on the basis of divisional revenues.
* Gross Return
Hubbard defined this as the earnings before interest & taxes (EBIT) divided by assets. To consider the interest rates the company pays for its recent borrowings, the gross (EBIT) return on assets was set to at least 12 percent. In order to achieve this level investment proposals would have to show a return of at least 15 percent in order to be approved.
Measurement, Reporting & Review Process Relative to Criteria
It was not mentioned in the case how the criteria is measured and reported.
Rewards & Incentives
It was not mentioned in the case if Enager gives rewards & incentives or penalties for good/bad performance.
Answers to Case Questions:
Question 1. Why was McNeil's new product proposal rejected? Should it have been? Explain.
Mc Neils proposal was rejected because it did not meet the 15% return required by Hubbard. So Enager Industries Inc., had missed the opportunity to increase its earnings per share of the company due to incorrectly setting a target rate for all three divisions.
PARTICULARS | PRODUCT A | PRODUCT B | PRODUCT C |
| | | |
No. of units sold | 100,000 | 75,000 | 60,000 |
S.P. per unit | $18 | $21 | $24 |
Total sales($) | 1,800,000 | 1,575,000 | 1,440,000 |
Variable cost per unit | $9 | $9 | $9 |
Total variable cost | 900,000 | 675,000 | 540,000 |
Total fixed cost | 510,000 | 510,000 | 510,000 |
Cost of goods sold($) | 1,410,000 | 1,185,000 | 1,050,000 |
Net income | 390,000 | 390,000 | 390,000 |
Total asset base($) | 3,000,000 | 3,000,000 | 3,000,000 |
Return from proposal* | 13% | 13% | 13% |
* return = net income / total asset base
Question 2. What inferences do you draw from a cash flow statement for 1993? Is a breakdown by divisions useful? (See Exhibit 4 for the calculation of Gross Return on Assets).
INFERENCES:
* The professional services division exceeded the 12% gross return target but the other two divisions failed to do so.
* Consumer division could have underemployed the assets in order to boost the gross ROA.
* Cost of Goods Sold & other expenses of industrial division...
