ENAGER INDUSTRIES, Inc

Background
Enager Industries, Inc. was a relatively young company whom manufactured and produced products/services within three divisions- Consumer Products, Industrial Products and professional Services. Consumer Products, the oldest among the three divisions in Enager, designed, manufactured and marketed a line of houseware items. Industrial Products built one of a kind machine tools to customer specifications. Professional Services, the newest among the three, provided several kinds of engineering services and this division had grown rapidly because of its capability to perform environmental impact studies.at the urging of CFO Henry Hubbard, Enagers President, Carl Randall, had decided to begin treating each division as an investment center, so as to be able to relate each divisions profit to the assets the division used to generate it profits.

Statement of the Problem

Areas of Considerations
The goal of the system is to improve the collective decisions within an organization.To be effective, management control systems should be (a) closely aligned to an organization's strategies and goals, (b) designed to fit the organization's structure and the decision-making responsibility of individual managers, and (c) able to motivate managers and employees to put in effort to attain selected goals desired by top management. Three divisions to consider: Consumer Products, Industrial Products and Professional Services. Consumer Products, the oldest among the three divisions in Enager, designed, manufactured and marketed a line of houseware items. Industrial Products built one of a kind machine tools to customer specifications. Professional Services, the newest among the three, provided several kinds of engineering services. Questions: Q1. Why was McNeil's new product rejected? should it have been? explain. Ans) The proposal was rejected because it did not satisfy the required criteria Of having a return of atleast 15% Calculations: PARTICULARS No. of units sold S.P. per unit Total sales($) Variable cost per unit Total variable cost Total fixed cost Cost of goods sold($) PRODUCT A 100,000 $18 1,800,000 $9 900,000 510,000 1,410,000 PRODUCT B 75,000 $21 1,575,000 $9 675,000 510,000 1,185,000 PRODUCT C 60,000 $24 1,440,000 $9 540,000 510,000 1,050,000

Net income Total asset base($) Return from proposal

390,000 3,000,000 13%

390,000 3,000,000 13%

390,000 3,000,000 13%

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 Industrial Professional service Total 74.3 74.2 74.2 10.8 7.2 3.3 21.3 60.8 44.4 18 123.2 34.6 54.6 0.0 89.2 4.6 4.6 4.6 13.8 100.0 103.6 22.6 226.2 10.8 6.9 14.6 9.4

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 ROA

1993

Inference

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 ROE 5.13% 5.45% More income earned in 93 due to boost in sales 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? Ans) 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: To generate profits from resources used. 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,if anything, should Randall do now about his investment centre concept? And what other advice do you have for Randall and Hubbard? Ans) 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. Q6)Design a balanced scorecard for Consumer, Industrial and Professional Service Division of enager industries. Be specific for each division. Ans) Balanced Scorecards tell you the knowledge, skills and systems that your employees will need (learning and growth) to innovate and build the right strategic capabilities and efficiencies (internal processes) that deliver specific value to the market (customer) which will eventually lead to higher shareholder value (financial). KPIs are defined for each perspective. Actuals is compared with targets

CUSTOMER 1.Non- conformities 2.Adhoc-requests 3. Customized solution 4. Customer satisfaction 5. Customer communication
Consumer Products Division

FINANCE 1.Growth 2.Growth through old & new customer 3. EBIT 4. Profit margin 5. Operating result

INTERNAL PROCESS 1. Contractual conflicts. 2. Deviation from budget 3.Update web report. 4.Procurement

LEARNING 1. Training 2. Employee development 3. Personal turnover. 4. Customer base 5.Social survey

CUSTOMER 1.Average hourly fee 2. Consultant retention by client 3. Customized solution 4. Customer satisfaction 5. Customer communication
Professional Services Division

FINANCE 1.Growth 2.Consulting hrs. generating revenue. 3. EBIT 4. Profit margin 5. Operating result

INTERNAL PROCESS 1. Critical Equipment Availability 2. Deviation from budget. 3. Update web report. 4. Regression Testing

LEARNING 1. Training 2. Employee development 3. Consultants generating revenue 4. Customer base

CUSTOMER 1.Non- conformities 2.Adhoc-requests 3. Customized solution 4. Customer satisfaction 5. Customer communication
Industrial Products Division

FINANCE 1.Growth 2.Growth through old & customer 3. EBIT 4. Profit margin 5. Operating result

new

INTERNAL PROCESS 1. Contractual conflicts. 2. Deviation from budget. 3. Update web report. 4. Procurement

LEARNING 1. Training 2. Employee development 3. Personal turnover. 4. Customer base 5.Social survey