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:
ROA
Gross 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:
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%

* return = net income / total asset base

Q2. WHAT INFERENCES DO YOU DRAW

FROM THE CASH FLOW STATEMENTS OF
1993?WAS IT USEFUL?

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

21.3

123.2

89.2

13.8

226.2

9.4

Total

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.

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?

PROFIT CENTRE

INPUT
COST($)

INVESTMENT CENTRE

OUTPUT

WORK

PROFIT($)

INPUTS ARE RELATED TO OUTPUTS

INPUT
COST($)

CAPITAL
EMPLOYED

OUTPUT
PROFIT($)

PROFITS ARE RELATED TO CAPITAL

EMPLOYED

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.

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 DIVISION
2. INDUSTRIAL PRODUCTS
DIVISION
3. PROFESSIONAL SERVICE
DIVISION

What is a balance Scorecard?

KPIs are defined for each perspective.

Actuals is compared with targets

THANK YOU