Essay About Roa Method And Different Divisions

Enager Industries, Inc
Duan Xu702041002Enager Industries, Inc.Case Assignment – 7 pts.Due 4/23 @ 6 pmNOTE:  Guidelines for Writing an Executive Summary-Style Case Analysis is available in the Resources section of Sakai.Mr. Randall has decided that each division should be treated as an investment center.  Each Division manager’s performance will be evaluated in terms of Return on Assets (ROA).  In a maximum of two double-spaced pages, discuss whether you agree or disagree with this decision and performance evaluation metric. For this company, it is not the best way for using ROA method to evaluate the managers’ performance. The reasons are following.Firstly, the ROA cannot apply a whole picture about the performance of Enager because it is not a fair method to estimate each divisions. Secondly, the consumer products division has some old equipment.  The method of ROA should use the book value of assets, which means the division would maintain these old asset to increase their ROA. The method would result a number which is unable to reflect the status of the company. Thirdly, according to the case, this method would decrease the probability of comparing with different divisions, and reduce the different cooperation between different divisions.Compared with the disadvantages of ROA method to evaluate the performance, there also are some advantages. Firstly, it is easier to calculate. Adding the three divisions’ assets is the whole company’s assets shown on the balance sheet. Secondly, the company and the divisions’ goal is clear. “Each division manager should try earn a gross return of 12%, and the new investment proposals would have to show a return of at least 15%”. Thirdly, it is easy to be attribution for the most assets, which means it is able to relate the profits of each company to generate the new profit.