enager industries,inc

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)•Division’s performance measured using: ROAGross ROA ROS•Investment 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

PARTICULARS PRODUCT A PRODUCT B PRODUCT C

No. of units sold 1,00,000 75,000 60,000

S.P. per unit $18 $21 $24

Total sales($) 18,00,000 15,75,000 14,40,000

Variable cost per unit $9 $9 $9

Total variable cost 9,00,000 6,75,000 5,40,000

Total fixed cost 5,10,000 5,10,000 5,10,000

Cost of goods sold($) 14,10,000 11,85,000 10,50,000

Net income 3,90,000 3,90,000 3,90,000

Total asset base($) 30,00,000 30,00,000 30,00,000

Return 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.

DIVISION SALES EBIT W/C FIXED ALLOC TOTAL GROSS ROA

Consumer 74.3 10.8 60.8 34.6 4.6 100.0 10.8

Industrial 74.2 7.2 44.4 54.6 4.6 103.6 6.9

Professional service

74.2 3.3 18 0.0 4.6 22.6 14.6

Total 21.3 123.2 89.2 13.8 226.2 9.4

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

1992 1993 Inference

ROA 5.67% 5.37% More assets employed in ’93 to boost sales

Gross ROA

9.49% 9.43% More assets employed in ’93 to boost sales

ROS 5.13% 5.45% More income earned in ’93 due to boost in sales

ROE 4.69% 4.74% ROE has improved which is of great importance for the stakeholders.

Formulae:

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

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

WHAT PITFALLS DID THEY APPARENTLY NOT ANTICIPATE?

WORKCOST($)

INPUT OUTPUT

PROFIT($)

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 OUTPUTS

PROFIT CENTRE

CAPITALEMPLOYED

INPUT

COST($)

OUTPUT

PROFIT($)

INVESTMENT CENTRE

PROFITS ARE RELATED TO CAPITAL EMPLOYED

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 centre’s ROI may decrease it’s 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 company’s market value.

Q7. DESIGN A BALANCED SCORECARD FOR :

1. CONSUMER PRODUCTS DIVISION2. INDUSTRIAL PRODUCTS DIVISION3. PROFESSIONAL SERVICE DIVISION

What is a balance Scorecard?

KPI’s are defined for each perspective.

Actuals is compared with targets

THANK YOU