Enager Industries

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Case 22-4 Enager Industries, Inc

Case 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, 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 1997. Both ROA and gross return dropped from 1996, 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.

The following are the exhibits of the case:

Exhibit 1
ENAGER INDUSTRIES, INC.
Income Statement
For 1996 and 1997
(thousands of dollars, except earnings per share figures
Year Ended December 31
1996 1997
Sales$70,731$74,225
Cost of sales54,10956,257
Gross margin16,62217,968
Other expenses:
Development4,0324,008
Selling and general6,5076,846
Interest9941,376
Total11,53312,230
Income before taxes 5,089 5,738
Income tax expense 2,036 2,295
Net income $3,053$ 3,443
Earnings per share (500,000 and 550,000 shares outstanding in 1996 and 1997, respectively) $6.11
$6.26

Exhibit 2
ENAGER INDUSTRIES, INC.
Balance Sheets
For 1996 and 1997
(thousands of dollars)

As of December 31
19961997
Assets
Current assets:
Cash and temporary investments$ 1,404$ 1,469
Accounts receivable13,68815,607
Inventories22,16225,467
Total current assets37,25442,543
Plant and equipment:
Original cost37,32645,736
Accumulated depreciation12,69115,979
Net24,63529,757
Investments and other assets2,1433,119
Total assets$64,032$75,419

Liabilities and Owners’ Equity
Current liabilities:
Accounts payable$ 9,720$12,286
Taxes payable1,2101,045
Current portion of long-term debt--1,634
Total current liabilities10,93014,965
Deferred income taxes559985
Long-term debt12,62215,448
Total liabilities24,11131,398
Common stock17,36819,512
Retained earnings22,55324,509
Total owners’ equity39,92144,021
Total liabilities and owners’ equity$64,032$75,419

Exhibit 3
RATIO ANALYSIS FOR 1996...
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