Evaluate Performance Evaluation System: Behavioral Issues: ATCO Company purchased Dexter Company three years ago. Prior to the acquisition. Dexter manufactured and sold electronic products to third-party customers. Since becoming a division of ATCO. Dexter now manufactures electronic components only for products made by ATCO's Macon Division. ATCO's corporate management gives the Dexter Division management consider- able latitude in running the division's operations. However, corporate management retains authority for decisions regarding capital investments, product pricing, and production quantities. ATCO has a formal performance evaluation program for all division manage- ments. The evaluation program relies substantially on each division's return on investment. The income statement of Dexter Division provides the basis for the evaluation of Dexter's divisional management. (See income statement below.) Division financial statements are prepared by the corporate accounting staff. Corporate general services costs are allocated on the basis of sales dollars, and the computer department's actual costs are apportioned among the divisions on the basis of use. The net division investment includes division fixed assets at net book value (cost less depreciation), division inventory, and corporate working capital appor- tioned to the divisions on the basis of sales-dollars.

Required:

a. Discuss the financial reporting and performance evaluation program of ATCO Company as it relates to the responsibilities of the Dexter Division.

b. Based on your response to requirement (a), recommend appropriate revisions of the financial information and reports used to evaluate the performance of Dexter's divisional management. If revisions are not necessary, explain why revi- sions are not needed.

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Sales revenue ATCO COMPANY Dexter Division Income Statement For the Year Ended October 31 Costs and expenses: Product costs: Direct materials Direct labor Factory overhead Total (in thousands) Less: Increase in inventory Engineering and research Shipping and receiving Division administration: Manager's office Cost accounting Personnel Corporate costs: General services Computer Total costs and expenses Divisional operating profit Net plant investment Return on investment 38 $4,000 2,550 120 240 332 278 3,520 $ 480 $1,600 30%