Enager Industries

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Enager Industries, Inc. Accounting Consultant’s Report

· Introduction

Enager Industries, Inc. was a relatively young company that consisted of three divisions with distinct services and products. At the urging of CFO Henry Hubbard, Enager’s president, Carl Randall, had decided to begin treating each division as an investment center, so as to be able to relate each division’s profit to the assets the division used to generate it profits.

· Analysis

However, several issues arose regarding this performance evaluation method and other management control choices. First of all, profitable new project at Consumer Products Division, whose return was 13% calculated from Exhibit 3, could not get approved from upper
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There were also too many confounding factors in calculating ROA in Enager’s case. Firstly, using net book value of assets (as shown in Exhibit2) in calculating the ROA would surely put those divisions with newer assets in disadvantage. With less depreciation, divisions with newer assets will have lower ROA due to a larger denominator of assets value. The more reasonable way in this case is to use the fair market value, which can better represent the assets’ value in producing profit. Secondly, it is unreasonable to allocate corporate expenses and assets to certain divisions based on divisional revenue. Since each division had different services and products, revenue could not be the basis of allocating those corporate expenses and assets that did not reflect performance of each division. These confounding factors may be able to explain those discrepancies Randall was confused about. As such, the use of ROA in this case is an ineffective method of performance evaluation.

· Recommendation

Based on the previous analysis, the solution to this case is to implement a new method of performance evaluation since ROA is such an ineffective method of performance evaluation.

One alternative worth perusing is to use the Balanced Scorecard method to evaluate division performance. Instead of measuring the performance only using financial data, Balanced Scorecard methods requires business units to be assigned goals and then measured form the perspectives

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