ENAGER INDUSTRIES, INC.

Each division is an independent company. Prior to 1992 : Profit center Post 1992 : Investment center Corporate income = summation ( each division's income)Corporate assets = summation ( each division's assets)Divisions performance measured using: ROAGross ROA ROSInvestment proposals with return > 15% were only approved.

Q1. WHY WAS MCNEIL'S NEW PRODUCT REJECTED? SHOULD IT HAVE BEEN? EXPLAIN.

The proposal was rejected because it did not satisfy the required criteria Of having a return of atleast 15%

Calculations:

* return = net income / total asset base

PARTICULARSPRODUCT APRODUCT BPRODUCT C

No. of units sold1,00,00075,00060,000S.P. per unit$18$21$24Total sales($)18,00,00015,75,00014,40,000Variable cost per unit$9$9$9Total variable cost9,00,0006,75,0005,40,000Total fixed cost5,10,0005,10,0005,10,000Cost of goods sold($)14,10,00011,85,00010,50,000Net income3,90,0003,90,0003,90,000Total asset base($)30,00,00030,00,00030,00,000Return from proposal*13%13%13%

Q2. WHAT INFERENCES DO YOU DRAW FROM THE CASH FLOW STATEMENTS OF 1993?WAS IT USEFUL?

INFERENCES:

1. The professional services division exceeded the 12% gross return target but the other two divisions failed to do so.2. Consumer division could have underemployed the assets in order to boost the gross ROA.3.Cost of goods sold and the other expenses of industrial division in comparison to consumers division could be high due to which its EBIT has fallen down.These inferences help us in performing a root cause analysis of the performance of each division.

DIVISIONSALESEBITW/CFIXEDALLOCTOTALGROSS ROA

Consumer74.310.860.834.64.6100.010.8Industrial74.27.244.454.64.6103.66.9Professional service74.23.3180.04.622.614.6Total21.3123.289.213.8226.29.4

Q3. WHAT INFERENCES ARE DRAWN FROM THE COMPARATIVE BALANCE SHEETS AND INCOME STATEMENTS FOR 1992-93?

Formulae:

ROA : (Net income) / (Total asset base) Gross ROA: (EBIT) / (Total asset base) ROS: (Net income) / (Total sales) ROE: (Net income) / (Total Equity)

19921993InferenceROA5.67%5.37%More assets employed in 93 to boost salesGross ROA9.49%9.43%More assets employed in 93 to boost salesROS5.13%5.45%More income earned in 93 due to boost in salesROE4.69%4.74%ROE has improved which is of great importance for the stakeholders.

Q4. EVALUATE THE MANNER IN WHICH RANDALL AND HUBBARD HAVE IMPLEMENTED THEIR INVESTMENT CENTRE CONCEPT.

WHAT PITFALLS DID THEY APPARENTLY NOT ANTICIPATE?

WORKCOST($)INPUTOUTPUTPROFIT($)A shift from profit centre concept to investment centre concept because:

Comparing absolute differences in profit is not meaningful. Difficult to compare profit performance unless assets employed is taken into account. Business unit managers have 2 performance objectives: 1. To generate profits from resources used. 2. To invest in additional resources only if it produces an adequate return.

INPUTS ARE RELATED TO OUTPUTSPROFIT CENTRECAPITALEMPLOYEDINPUTCOST($)OUTPUTPROFIT($)INVESTMENT CENTREPROFITS ARE RELATED TO CAPITAL EMPLOYED

To attain the above 2 objectives, a shift was required.*

Hubbard and Randall used ROI to measure the assets employed.

The Pitfalls

ROI provides different incentives for investments across business units. Decisions that increase a centres ROI may decrease its overall profits.

Q5.WHAT SHOULD RANDALL DO ABOUT HIS INVESTMENT CENTRE CONCEPT?

Q6. WHAT ADVICE DO YOU HAVE FOR RANDALL AND HUBBARD?

Randall and Hubbard must use EVA for measuring and controlling the assets employed.

EVA = Capital employed * (ROI Cost of Capital)

Advantages of EVA: All business units have same profit objective for comparable investments. Different interest rates may be used for different types of assets. It has a stronger positive correlation with changes in companys market value.

Q7. DESIGN A BALANCED SCORECARD FOR : 1. CONSUMER PRODUCTS DIVISION2. INDUSTRIAL PRODUCTS DIVISION3. PROFESSIONAL SERVICE DIVISION

What is a balance Scorecard?

KPIs are defined for each perspective.

Actuals is compared with targets

Balanced Scorecards tell you the knowledge, skills and systems that youremployees will need (learning and growth) to innovate and build the rightstrategic capabilities and efficiencies (internal processes) that deliver specificvalue to the market (customer) which will eventually lead to highershareholder value (financial).*

Plz refer xcel sheet*

Refer xcel sheet*

Refer xcel sheet*

THANK YOU

To attain the above 2 objectives, a shift was required.*Balanced Scorecards tell you the knowledge, skills and systems that youremployees will need (learning and growth) to innovate and build the rightstrategic capabilities and efficiencies (internal processes) that deliver specificvalue to the market (customer) which will eventually lead to highershareholder value (financial).*Plz refer xcel sheet*Refer xcel sheet*Refer xcel sheet*