Division managers of Atlantis, Ltd., have expressed dissatisfaction with the company’s division performance measurement system. Division operations are evaluated every quarter by comparing their EVA with the expected EVA identified in the prior year. Division managers claim that many factors are completely out of their control but are included in this comparison, which they say results in an unfair and misleading performance evaluation.

Pressure by top management to reflect increased earnings has often caused division managers to overstate operating income before taxes. In addition, once the EVA target has been set, divisions must live with it; no adjustments for unforeseen events are possible. Frequently, external factors (the economy, competitors’ actions, and changes in consumer tastes) have not been recognized in the EVA targets that top management supplied to the divisions.

Recognizing these problems, top management agreed to review its procedures. Based on this review, it proposed to change its procedures so division managers have the opportunity to show how they deal with unforeseen events. Top management also agreed to use relative performance evaluation by comparing each division’s performance to the performance of other divisions in the same industry and to the performance of outside companies in the same industry.

Required Write a report to Atlantis top management that explains whether the proposed changes are an improvement over the evaluation of division performance that it now uses. Be sure to address how the company proposes to implement relative performance evaluation.