Projected Results to Meet Corporate Objectives Grout Inc. is a wholly owned subsidiary of Slait Co. The philosophy of Slait’s management is to allow the subsidiaries to operate as independent units. Corporate control is exercised through the establishment of minimum objectives for each subsidiary, accompanied by substantial rewards for success and penalties for failure. The time period for performance review is long enough for competent managers to display their abilities.

Each quarter, the subsidiary is required to submit fi nancial statements. The statements are accompanied by a letter from the subsidiary president explaining the results to date, a forecast for the remainder of the year, and the actions to be taken to achieve the objectives if the forecast indicates that the objectives will not be met.

Slait management, in conjunction with Grout management, had set the objectives listed below for the year ending September 30, 2011. These objectives are similar to those set in previous years.

• Sales growth of 10%

• Return on stockholders’ equity of 20%

• A long-term debt-to-equity ratio of not more than 1.0

• Payment of a cash dividend of 50% of net income, with a minimum payment of at least $500,000 Grout’s controller has just completed preparing the fi nancial statements for the six months ended March 31, 2011, and the forecast for the year ending September 30, 2011. The statements are presented below.

After a cursory glance at the fi nancial statements, Grout’s president concluded that not all objectives would be met. At a staff meeting of the Grout management, the president asked the controller to review the projected results and recommend possible actions that could be taken during the remainder of the year so that Grout would be more likely to meet the objectives.

Grout Inc.

Income Statement

(thousands omitted)

Year Ended Six Months Forecast for September 30, Ended Year Ending 2010 March 31, 2011 September 30, 2011 Sales $ 10,000 $6,000 $12,000 Cost of goods sold $ 6,000 $4,000 $ 8,000 Selling expenses 1,500 900 1,800 Administrative expenses and interest 1,000 600 1,200 Income taxes 500 300 600 Total expenses and taxes $ 9,000 $5,800 $ 11,600 Net income $ 1,000 $ 200 $ 400 Dividends declared and paid 500 0 400 Income retained $ 500 $ 200 $ 0 Grout Inc.

Statement of Financial Position

(thousands omitted)

September 30, March 31, Forecast for 2010 2011 September 30, 2011 Assets Cash $ 400 $ 500 $ 500 Accounts receivable (net) 2,100 3,400 2,600 Inventory 7,000 8,500 8,400 Plant and equipment (net) 2,800 2,500 3,200 Total assets $ 12,300 $14,900 $ 14,700.

September 30, March 31, Forecast for 2010 2011 September 30, 2011 Liabilities and Equities Accounts payable $ 3,000 $ 4,000 $ 4,000 Accrued taxes 300 200 200 Long-term borrowing 4,000 5,500 5,500 Common stock 4,000 4,000 4,000 Retained earnings 1,000 1,200 1,000 Total liabilities and equities $ 12,300 $14,900 $14,700 Required 1. Calculate the projected results for each of the four objectives established for Grout Inc. State which results will not meet the objectives by year-end.
2. From the data presented, identify the factors that seem to contribute to the failure of Grout Inc. to meet all of its objectives.
3. Explain the possible actions that the controller could recommend in response to the president’s request.
AppendixLO1