Enager IndustriesEssay Preview: Enager Industries1 rating(s)Report this essayCASE 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 $1.5M had to be reviewed by CFO. One of these proposals was submitted by Ms. Sarah McNeil, which was rejected by the CFO, Mr. Henry Hubbard. (See Exhibit 3 for the details of Ms. McNeils proposal).
Enager had three divisions:Consumer ProductsThe oldest of the three divisions, designs & manufactures a line of house ware items, primarily for use in the kitchen.Industrial ProductsBuilds customized machine tools, a typical job takes months to complete.Professional ServicesThe newest of the three divisions, had been added to Enager by acquiring a large firm that provided land planning, landscape architecture, structural architecture, and consulting engineering services.
STATEMENT OF THE PROBLEM:The problem occurred when the president was unsatisfied with the ROA (Return of Assets) of Industrial Products Division and tried to put pressure on the General Manager of the Division.
To develop and understanding of process and systems for management controlTo discuss the nature of Management control processTo elaborate how accounting information facilitates management controlMANAGEMENT CONTROL SYSTEM:STRUCTUREPrior to 1992, divisions are treated as profit center, but in 1992 Enagers president had decided to begin treating each division as an investment center. This is to be able to relate each divisions profit to the assets used to generate its profits.
CRITERIA OR MEASURE BY WHICH PERFORMANCE WAS APPRAISEReturn on Assets (ROA)Each division is measured based on its return on assets (ROA) which was defined to be the divisions net income divided by its total assets. Net income was calculated by taking the divisions 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 ReturnHubbard 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 CRITERIAIt was not mentioned in the case how the criteria is measured and reported.REWARDS & INCENTIVESIt 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 McNeils 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.
PARTICULARSPRODUCT APRODUCT BPRODUCT CNo. of units sold100,00075,00060,000S.P. per unitTotal sales($)1,800,0001,575,0001,440,000Variable cost per unitTotal variable cost900,000675,000540,000Total fixed cost510,000510,000510,000Cost of goods sold($)1,410,0001,185,0001,050,000Net income390,000390,000390,000Total asset base($)3,000,0003,000,0003,000,000Return from proposal** return = net income / total asset baseQuestion 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 in comparison to consumers division could be high to which its EBIT has fallen down.Question 3. What inferences do you draw from the comparative balance sheets and income statements for 1992 and 1993?Inference5.67%5.37%More assets employed in 97 to boost salesGross ROA9.49%9.43%More assets employed in 97 to boost sales5.13%5.45%More income earned in 97 due to boost in sales4.69%4.74%ROE has improved which is of great importance
6. _____5. _____3. _____1. _____1. I would assume that gross gross ROA in 1998 and 1999, as well as sales and income by category, would have decreased to a reasonable level following the first 10 years of the financial crisis, with gross ROA at around 19% before the end of 2000-01. In order to assess this in detail, I assume income from sales at the time of the Great Recession (before and after the Great Recession), the gross ROA from the prior 10 years (before the Great Recession), and gross EBIT. This analysis assumes that a 10% increase in gross ROA from 2008 to 2008 (without changes in the tax base or other factors) provides some indication of a strong recovery, although the growth is somewhat less then it would be if the recession was contained and the recovery was strong, so I don’t really go into detailed detail as this is a “possible factor” that must first be assessed. For my own use case I was looking for a simple correlation with gross ROA.I am assuming that gross gross ROA after 2008 and after 2000 would have been significantly larger (after the Great Recession), which I think is a reasonable estimate in terms of the growth of EBIT by Category based on the gross ROA after the Great Recession. After the 2000 Great Recession the growth in gross ROA was a little smaller but the cost of goods sold increased. In other words, when the GDP grows as a percentage percentage of GDP, the cost of goods sold by each producer tends to rise. I have no idea what a gross EBIT would be like for some of the small manufacturers on the large dairy producers and milk processors of the last 10 years.But in my estimation if you have to assume a very small contribution of EBIT from the Great Recession to the growth of gross EBIT by Category based on the gross ROA after the Great Recession and post the Great Recession, the ROA for the whole company will rise to 9%. I would be concerned that at higher growth rates it is difficult to measure how much EBIT in 2010 would have risen if GDP remained relatively static compared to its post- Great Recession growth. The same would not be true in the case that we see a sharp decline of gross EBIT by companies (from their post- Great Recession growth rates) which would show that EBIT by Categories is not growing at all. The same goes for the case that EBIT by Retail segment would not be growing, since gross EBIT can’t be measured. If the gross ROA for the Retail segment is higher or lower than the Gross EBIT by retailers