Evaluating a company wide performance report. France Inc. has two divisions: Bastille and Versailles
This question concerns Bastille Div. Bonuses for the division managers are based on a formula that (1) compares the two division’s ROIs to award one part of the total bonus, and (2) evaluates the individual division’s variances from their own budget to award the second part of the bonus. Some information on the divisions is as follows:
1. The divisions are completely decentralized.
2. All (100%) of Bastille’s sales are to the other division: Versailles. Bastille’s original purpose is to make and supply Versailles with components it requires.
3. Versailles is 10 times larger than Bastille.
Below are the detailed accounts used to calculate the ROI measure and the variances (ie differences) for Bastille. Bastille Division. Performance report For the year ended December 31, 2015 Actual results Original (Master) 2015 Budget for 2015 Difference Production data Units produced 2,400 2,300 100 4.3% Financial Data ($000) Sales $138,000 $162,800 (24,800) (15.2%) Production cost of units sold Raw materials $32,000 $40,000 (8,000) (20.0%) Labor $41,700 $53,000 (11,300) (21.3) Factory Overhead $29,000 $37,000 (8,000) (21.6%) Cost of units sold $102,700 $130,000 $(27,300)(21.0%) Other costs Headquarter charges for: Personnel services $228 $210 18 8.6% Accounting services $425 $440 (15) (3.4%) Headquarter costs $300 $525 (225) (42.9%) Total other costs $953 $1,175 $(222) (18.9%) Adjustments to Income Unreimbursed fire loss 0 $52 ($52) (100.0%) Losses due to raw materials deterioration $125 0 125 - Total adjustments $125 $52 $73 140.4% Total expenses and deductions $103,778 $131,227 (27,449) (20.9%) Division income $34,222 $31,573 $2,649 8.4% Division investments $92,000 $73,000 $19,000 26.0% (defined as net book value of Property, Plant, and Equipment) Return on Investment 37% 43% (Div Inc / Div investments) Some additional information on the Bastille costs are: Corporate practices include: - Headquarters does all personnel and accounting work for the divisions. -
Personnel are allocated based on number of employees; accounting is allocated based on total expenses paid.
Divisional administration expenses are included in the manufacturing fixed overhead costs.
Headquarter costs are costs of CEO, CFO, etc. salaries and their administrative staff and are assigned to divisions based on sales of new products. The Division Investment dollars equal net book value of the fixed assets for the division (i.e. net of accumulated depreciation). It should be noted that the divisional managers have the authority and responsibility to manage the inventory, and accounts payable. Divisional managers do not have authority and responsibility for marketable securities and other current working capital accounts. Also, divisional investment includes a building that has not been used for decades because headquarters has ordered it held for future use. As well, the minimum rate of return for the company is 20%.
Required for question 1 part a and b.
Please prepare a one paragraph summary for part a and b of the question that provides your answers and recommendations with supporting arguments and calculations for the following:
1. What is the residual income for Bastille? Defend the ROI or residual income measure as most appropriate for part (1) of the bonus for France Inc.’s Bastille Division.
2. Criticize the components of the performance metric for Bastille. Use bullet form, but make sure a brief justification for your criticism is clear and concise. For example, should “Losses due to raw material deterioration” be included in the performance metric? Please provide 7 criticisms.