Enager Industries

CASE 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. McNeil's proposal).

Enager had three divisions:

 Consumer Products

The oldest of the three divisions, designs & manufactures a line of house ware items, primarily for use in the kitchen.

 Industrial Products

Builds customized machine tools, a typical job takes months to complete.

 Professional Services

The 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 control

 To discuss the nature of Management control process

 To elaborate how accounting information facilitates management control

MANAGEMENT CONTROL SYSTEM:

STRUCTURE

Prior to 1992, divisions are treated as profit center, but in 1992 Enager's president had decided to begin treating each division as an investment center. This is to be able to relate each division's profit to the assets used to generate its profits.

CRITERIA OR MEASURE BY WHICH PERFORMANCE WAS APPRAISE

 Return on Assets (ROA)

Each division is measured based on its return on assets (ROA) which was defined to be the division's net income divided by its total assets. Net income was calculated by taking the division's 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 Return

Hubbard 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 CRITERIA

It was not mentioned in the case how the criteria is measured and reported.

REWARDS & INCENTIVES

It 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 McNeil's 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.

PARTICULARS PRODUCT A PRODUCT B PRODUCT C

No. of units sold 100,000 75,000 60,000

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

Total sales($) 1,800,000 1,575,000 1,440,000

Variable cost per unit $9 $9 $9

Total variable cost 900,000 675,000 540,000

Total fixed cost 510,000 510,000 510,000

Cost of goods sold($) 1,410,000 1,185,000 1,050,000

Net income 390,000 390,000 390,000

Total asset base($) 3,000,000 3,000,000 3,000,000

Return from proposal* 13% 13% 13%

* return = net income / total asset base

Question 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?

1996 1997 Inference

ROA 5.67% 5.37% More assets employed in '97 to boost sales

Gross ROA 9.49% 9.43% More assets employed in '97 to boost sales

ROS 5.13% 5.45% More income earned in '97 due to boost in sales

ROE 4.69% 4.74% ROE has improved which is of great importance