I am looking for the answer to the attached accounting case.

Prem Lobo

Jeff Gillick, CEO of Enteron Inc. sighs as he examines the performance of three of Enteron's divisions. In 2006 the development division recorded another good year, with actual profits exceeding budget by 25%. Meanwhile the operations division recorded a loss for the year, a shortfall of 30% from budgeted profits. The gas division recorded the best performance of all three with profits 75% in excess of budget.

Jeff i puzzled by the wide profit variances among his divisions. Each division is a profit centre with the respective divisional manager receiving a bonus based on profitability. At present the gas division will receive the biggest bonus. However, before finalizing bonuses, Jeff wants you as a consultant to review the variances and identify potential issues. In particular he notes "I want to be sure that our division managers receive bonuses for the right reasons. I don't want my managers to be punished - or rewarded - unfairly."

You learn:

development division

• constructs power stations in Asia, South America and Eastern Europe
• Takes two years to build
• once built sold internally to ops. The difference between the sale price and construction cost being reported as profit for development division.
• The larger the station the higher the predetermined price
• develops overly large stations - mostly

Operations division

• generates revenue by selling electricity produced to customers
• Incurs operating costs
• operate rules stipulate that ops must purchase all power stations constructed by development division
• new stations take 4 years to reach profitability
• Larger stations take longer
• largest station was shut down for a number of months due to employee error (employee was not properly trained)

Gas Division

• supplies natural gas to factories in Europe and North America
• 2006 - entered into a complex sales agreement with large commercial customer. Agreement guarantees a discount for 20 years. GAAP rules - the division recorded the discounted present value of all future revenues during 2006
• price of gas is volatile
• prices have increased 50% over past 10 years

Prepare a report for CEO discussing the profit variances of the divisions in relation to the information provided. Identify any issues he should be concerned about before he assesses the performance of each division's managers.