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.
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 management because it could not reach the pre-determined universal target return of at least 15 percent, even if all the divisions had completely different line of business. This could potentially discourage product development managers’ incentive to engage in new projects. More importantly, the company could miss out the opportunity on new products in the long-run, although it might not have a large return right away in the short-run.
Secondly, the president of the company, Carl Randall, was both puzzled and disappointed at the discrepancies among the performance evaluation parameters of the company in 1993. Both ROA and gross return dropped from 1992, while return on sales and return on owners’ equity increased. There were also discrepancies across different divisions, as Professional Service easily exceeded the 12% gross return target; while other two divisions, especially the Industrial Product division had a ROA that was only 6.9%. These discrepancies could increase the difficulties for the top management to understand the performance, thus hindered manager’s ability to make good decisions.
Last but not least, general manager of Industrial Product Division was put much pressure by Randall, the president, because the...