Enager Industries

Enager Industries, Inc. Accounting Consultants hatch Introduction Enager Industries, Inc. was a relatively green c all in aller-up that consisted of three sectionalisations with explicit run and products. At the urging of CFO total heat Hubbard, Enagers chair, Carl Randall, had decided to begin treating all(prenominal) division as an investment center, so as to be able to reach each divisions wage to the as points the division enjoymentd to generate it profits. abridgment However, several issues arose regarding this operation evaluation ashes and early(a) focussing control choices. eldest of all, profitable vernal project at Consumer growths Division, whose takings was 13% calculated from render 3, could non get approved from top(prenominal) management because it could non reach the pre- qualifyd linguistic universal organize croak of at to the lowest degree 15 percent, even if all the divisions had al 1 several(predicate) line of business. This could potentially dissuade product development carriages incentive to use up in new projects. More importantly, the company could miss out the opportunity on new products in the long-run, although it might not have a large return right a dash in the short-run.Secondly, the president of the company, Carl Randall, was both puzzled and disappointed at the discrepancies among the murder evaluation parameters of the company in 1993. Both ROA and crude return dropped from 1992, age return on sales and return on owners equity incrementd. in that respect were as well as discrepancies across opposite divisions, as sea captain Service easily exceeded the 12% gross return target while other two divisions, especially the industrial Product division had a ROA that was provided 6. 9%.These discrepancies could increase the difficulties for the top management to learn the action, thus hindered managers expertness to make good decisions. Last however not least, general manager of industria l Product Division was put very much pressure by Randall, the president, because the division degenerate behind compargond to the other two in terms of ROA. The divisional general manager argued that they could have chance ond a higher ROA if they had fourth-year assets as Consumer Products Division did, but Randall could not understand the relevance of the argument.This is not only a communication problem, but similarly an evaluation problem caused by the out or keeping(p) treatment of the assets regard as that is used in calculating ROA. By analyzing the management problems mentioned above, in kitty be concluded that these problems are the consequences of several management control mistakes, including absurd target setting, inefficient method of performance evaluation, and problematic treatment of assets value. Top management of Enager should not set an identical tendency for all the divisions since all the divisions engaged in distinct service or production.The genius o f those distinct businesses certainly required different amount of assets to operate, and they would face different aims of competition, and they would sure have different profit margins. Therefore, it was senseless only using one mavin target return to evaluation all the new projects from all three divisions to square off if the projects were profitable. In the nerve, McNeils proposal was rejected because it did not meet the 15% target return. However, the new project did have a favorable residual income and demonstrated the a return of 13%, which can increase the EPS for the company.If any benchmark were to be set to prise the profitability of new projects, it should be carefully engineered according to peculiar(prenominal) short letter that can be applied to specific division, with the comparison to other competitors in the labor or to past performance. For example, Enager can collapse a precedent be system based on historical and remote information (including fina ncial information, market information, etc) that can allows management to create a standard profit level.A standard following system can further allows cost and profit variance analysis, which can be a very powerful rooster for management control later on. There were also too many discombobulate f bitors in calculating ROA in Enagers case. Firstly, using net book value of assets (as shown in Exhibit2) in calculating the ROA would for certain put those divisions with newer assets in disadvantage. With less depreciation, divisions with newer assets will have lower ROA due to a larger denominator of assets value. The more reasonable way in this case is to use the elegant market value, which can better trifle the assets value in producing profit.Secondly, it is unreasonable to divvy up corporate expenses and assets to certain divisions based on divisional revenue. Since each division had different services and products, revenue could not be the basis of allocating those corporate expenses and assets that did not study performance of each division. These confounding factors whitethorn be able to explain those discrepancies Randall was separated about. As such(prenominal), the use of ROA in this case is an ineffective method of performance evaluation. passportBased on the previous analysis, the tooth root to this case is to implement a new method of performance evaluation since ROA is such an ineffective method of performance evaluation. unmatchable selection worth perusing is to use the equilibrise wit method to guess division performance. Instead of measuring the performance only using financial data, match nock bill sticker methods requires business units to be delegate goals and then measured form the horizons of financial, customer, inside business and innovation and learning.For example, Enager can evaluate the divisions based on the quality of the products, level of innovation, employees contribution to the whole company, etc. Balanced bi ll of fare can be a very critical supplement to financial data because it is part of strategy planning. The Industrial Products group may no overnight be under evaluated because of less-than-perfect financial data. Essentially, a Balanced Score billhook method allows the trough to see the big picture on the strategic level.A Balanced Scorecard method can also kick upstairs balances among different strategies in an effort to achieve goal congruence, thus encouraging employees to act in the organizations beaver interest. Profitable new projects, like the one that McNeil had proposed, would have a chance of getting approved because it would benefit the company as a whole since it could increase Enagers EPS. Another advantage of implementing Balanced Score card is that it promotes comparability among different divisions with distinct line of business.Unlike ROA, Balanced Scorecard taken in to accounts of different perspective of the business into account, since the comprehensive val ue of the division is reflected in the Balanced Score card design. By implementing Balanced Score card method, the upper management of Enager can detect a broad-base view of the company in terms of goals and strategy. Although it requires additional work for executives to necessitate a mix of measurement that accurately reflect the critical factors that will determine the success of the company, it is a better alternative here than ROA as a performance evaluation method.