E.N Industries Case Analysis

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• Three divisions: Consumer Product :1/3 of E.N.’s total sales – oldest, designed, manufactured & marketed houseware items for the use in the kitchen Industrial Product :1/3 of E.N.’s total sales – built one-of-a-kind machine tools, a job that took months to complete Professional Services :1/3 of E.N.’s total sales – newest and grew rapidly, architecture related business • New proposal $1.5 million+ should be validated by Henry Hubbard, the CFO of the company and has to earn a return of more than 15%. Performance evaluation Y0: each division treated as profit center with annual division profits budget From Y1: became investment center evaluated by ROA ROA = NI/Total Assets NI = DIBT – share of corporate administrative expenses – share of income tax expenses Share of corporate administrative expenses is allocated on the basis of divisional revenue Tax rate applies to the division’s (DIBT – share of corporate administrative expenses) Most assets were separated. The corporate-office assets were allocated according to divisional revenue. Assets were recorded at balance sheet value. Results Y0: ROA = 5.2%, Gross return = 9.3% Targets for Y1 & Y2: Gross return = 12% (Low return investment due to regulatory reasons + 15% Gross return from) other investments Y1: ROA = 5.7% Gross Return = 9.5% IP division’s return on investment too low. The division manager responded: if we had a lot of old machines the way CP does. Y2: ROA = 5.4% Gross return = 5.5% However, return on sales rose fro; 5.1% to 5.5%, ROE rose from 9.1% to 9.2% PS division exceeded the 12% target, CP = 10.8%, IP=6.9% Questions. 1. a. Here for each division, NI = DIBT – share of corporate administrative expenses – share of income tax expenses. However, according to the controllability idea, ”the performance measure excludes revenues or expenses which are out of the span of

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