The effect of asset base on performance measurement The Stichler Auto Parts Company produces automobile parts for all the major United States automobile manufacturers. For 35 years, the company has operated a manufacturing plant in southeast Michigan to minimize shipping costs and service its clients efficiently. Demand for products in the late 1960s caused the company to build an additional manufacturing plant. The dispersion of the automobile industry in the last twenty years and favorable state tax incentives caused the company management to build the new plant in the South. The company operates the two plants as separate investment centers.

The management of each plant is evaluated on performance, and year-end bonuses are based primarily on the divisional performance reports. Recently the company has had trouble keeping managers at the new plant, because bonuses have been very small compared with the Michigan plant. Below are data for the two divisions for the year just completed.

The higher depreciation charges at the Southern plant are partially offset by lower taxes and other costs.
REQUiRED

a. Compute the net income for the two divisions.

b. Compute the return on investment for both divisions using gross assets.

c. Compute the return on investment for both divisions using net assets.

d. Comment on the company's divisional performance measures and its problem with retaining managerial personnel at its Southern plant.

Transcribed Image Text:

Division Michigan Southern Sales $8,000,000 $8,000,000 Manufacturing expenses.. 4,500,000 4,800,000 Marketing and distribution expenses 1,200,000 1,500,000 Administrative expenses. 1,600,000 1,100,000 Current assets 1,000,000 1,000,000 Buildings 2,500,000 9,000,000 Accumulated depreciation, buildings 2,200,000 2,500,000 Equipment ... 6,000,000 8,000,000 Accumulated depreciation, equipment. 3,300,000 3,000,000