Performance Evaluation - Recognizing Issues in Performance Evaluation

Performance Limited Income Statement for the year ended December 30, 2020 (in $000s)

	Division A	Division B	Division C	Division D	Corporate Office	Total
Sales	$3,400	$5,000	$11,800	$6,800		$27,000
Cost of Goods Sold	1,800	2,800	6,600	3,700		14,900
Gross Margin	1,600	2,200	5,200	3,100		12,100
Selling, General and Administrative Expenses	70	720	2,450	1,100	5,200	9,540
Corporate office Allocation	655	963	2,272	1,310	(5,200)	0
Operating Income	875	517	478	690		2,560
Interest Expense	0	0	0	112		112
Net Income before Taxes	875	517	478	578		2,448
Income Tax expense	350	207	191	231		979
Net Income before Discontinued Operations	525	310	287	347		1,469
Loss (after taxes) from Discontinued Operation						(277)
Net Income						$1,192

Additional Information

	Division A	Division B	Division C	Division D	Corporate Office	Total
Assets	$1,400	$2,900	$3,800	$3,200	$600	$11,900
Return on investment	37.5%	10.7%	7.6%	10.8%		12.3%
Shareholder's Equity						%5,800

Notes

Division A is relatively new and sales have grown 9% year over year for its first three years and are forecasted to grow 7% and 6% over the next two years.

Division B has been operating for the past 7 years. It has two manufacturing plants that are running below capacity and executive management at Corporate Office have advised the General Manager of the Division to move all production to one plant as head office is going to sell the unneeded machinery and equipment that is on the books at a value of $700,000. The statements above have segregated the costs to date of discontinuing the operations of the idle plant.

Division C is the oldest division (over 30 years old) with mature products. Its workforce is very stable and has very little turnover in personnel. Head office calculations show that It is earning 7.6% based on assets valued at $3,800,000.

Division D has been in existence for six years and is much more volatile than the other divisions. Sales have varied by as much as 15% year to year. This past year, sales were up 10% from the prior year but down 5% from the year before last. Management is forecasting an average of 5% growth in sales up to 2017. Corporate Office issued bonds to finance this division.

The corporate office makes all capital investment and financing decisions for the operating divisions and allocates its costs to the operating divisions The weighted average cost of capital is 10% and the Board of Directors at the Parent Company have discussed their goal to ensure all divisions that cannot earn tis 10% threshold should be shut down with resources devoted to division with greater returns and future growth.

The Board and executive management have focused their attention almost entirely on the niche markets of Divisions A, B, and D over the past few year as they see this as the future of the firm. To motivate the general managers, the Board is proposing a bonus plan to reward divisions earning in excess of the 10% Weighted Average Cost of Capital.

All divisions are budgeting the same gross margin percent for the next three years.

Required:

What are the key issues you see in terms of the current performance evaluation and plans to close divisions not earning the 10% cost of capital?

Hint look for about 5 issues that should be addressed and write one or two short sentences on each. It is not necessary to do a significant number of calculations.