Analyze Performance Report for Decentralized Organization: Bio-grade Products manufactures animal feeds and feed supplements. The need for a widely based manufacturing and distribution system has led to a highly decentralized management structure. Each divisional manager is responsible for production and distribution of corporate products in one of eight geographical areas of the country.

Residual income is used to evaluate divisional managers. The residual income for each division equals each division's contribution to corporate profits before taxes less a 20 percent investment charge on a division's investment base. The investment base of each division is the sum of its year-end balances of accounts receivable. inventories, and net plant fixed assets (cost less accumulated deprection). Corporate policies dictate that divisions minimize their investments in receivables and invento- ries. Investments in plant fixed assets are a joint division/corporate decision based on proposals made by divisional plant managers, available corporate funds, and general corporate policy. Alex Williams, divisional manager for the Southeastern Sector. prepared the Year 2 and preliminary Year 3 budgets for his division late in Year 1. Final approval of the Year 3 budget took place in late Year 2, after adjustments for trends and other information developed during Year 2. Preliminary work on the Year 4 budget also took place at that time. In early October of Year 3, Williams asked the divisional controller to prepare a report that presents performance for the first nine months of Year 3. The report is reproduced in Exhibit A below.

Required:

a. Evaluate the performance of Alex Williams for the nine months ending September Year 3. Support your evaluation with pertinent facts from the problem.

b. Identify the features of Bio-grade Products' divisional performance measurement reporting and evaluating system that need to be revised if it is to effectively reflect the responsibilities of the divisional managers.

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Exhibit A (22-32) BIO-GRADE PRODUCTS-SOUTHEASTERN SECTOR (in thousands) Year 3 Year 2 Nine- Nine- Annual Month Month Annual Budget Budget Actual Budget Actual Results Sales $2,800 $2,100 $2,200 $2,500 $2,430 Divisional costs and expenses: Direct materials and labor 1,064 798 995 900 890 Supplies 44 33 35 35 43 Maintenance and repairs 200 150 60 175 160 Plant depreciation 120 90 90 110 110 Administration 120 90 90 90 100 Total divisional costs and expenses 1,548 1,161 1,270 1,310 1,303 Divisional margin 1,252 939 930 1,190 1,127 Allocated corporate fixed costs 360 270 240 340 320 Divisional profits $ 892 $ 669 $ 690 $ 850 $ 807 Budgeted Balance 12/31/Year 3 Divisional investment: Accounts receivable Inventories $ 280 Plant fixed assets (net) 500 1,320 Total $2,100 "Bio-grade's sales occur uniformly throughout the year Budgeted Balance Actual Balance 9/30/Year 3 9/30/Year 3 $ 290 $ 250 500 1,350 650 1,100 $ 250 450 1,150 $2,140 $2,000 $1,850 Budgeted Balance 12/31/Year 2 Actual Balance 12/31/Year 2 $ 250 475 1,100 $1,825