18.31 Choosing type of responsibility centre; support cost allocation; ROI LO2, 3 The ATCO Company purchased the Dexter Company three years ago. Prior to the acquisition, Dexter manufactured and sold plastic products to a wide variety of customers. Since becoming a division of ATCO, Dexter only manufactures plastic components for products made by ATCO's Macon division. Macon sells its products to hardware wholesalers. ATCO's corporate management gives the Dexter division management a considerable amount of authority in running the division's operation. However, corporate management retains the authority for decisions regarding capital investments, price setting of all products, and the quantity of each product to be produced by the Dexter division. ATCO has a formal performance evaluation program for the management of all of its divisions. The performance evaluation program relies heavily on each division's return on investment. The accompanying statement of profit or loss of the Dexter division provides the basis for the evaluation of Dexter's divisional management. The corporate accounting staff prepare all of the divisions' financial statements. The 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 apportioned to the division on the basis of sales dollars. Sales Costs and expenses: Direct materials Direct labour Factory overhead Total Less: Increase in inventory Cost of sales Engineering and research Shipping and receiving Division administration: Manager's office Cost accounting Personnel Total division administration Corporate headquarters costs: Computer General services Dexter division of ATCO Company Statement of profit or loss for the year ended 31 October (in thousands of dollars) $ 500 1100 1300 $4000 2900 350 2550 120 210 48 230 Total corporate headquarter costs 240 332 Total costs and expenses Divisional operating income Net plant investment 480 $1600 30% Return on investment 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 upon your response to part (a), recommend appropriate revisions of the financial information and reports used to evaluate the performance of Dexter's divisional management. If you conclude that revisions are not necessary, explain why they are not needed.