Please help to identify issues, analysis of the profit variances of the divisions in relation to the information provided.
Prem Lobo Jeff Gillick, the 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 percent. Meanwhile, the Operations Division recorded a loss for the year, a shortfall of 30 percent from budgeted profits. The Gas budget. Division recorded the best performance of all three, with profits 75 percent in excess of Jeff is 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 prof- itability. At present the Gas Division will receive the biggest bonus. However, before final- izing 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 the following: Development Division This division constructs power stations in Asia, South America, and Eastern Europe. A typical power station takes two years to build. Once constructed, the power stations are "sold" internally to the Operations Division, with the difference between the sale price and the construction cost being reported as profit by the Development Division. Enteron's corporate management has set a predetermined price for the sale of power stations from the Development Division to the Operations Division. The larger the power station, the higher the predetermined price. The Development Division has been developing mostly large-scale power stations. This division has been in the news lately owing to an extremely large power station in Asia that has resulted in environmental concerns. Operations Division This division buys power stations constructed by Enteron's Development Division and operates them. It generates revenue by selling electricity produced to customers, and it incurs operating costs. The Operations Division is required by corporate rules to purchase all power stations constructed by the Development Division. New power stations typically take four years to reach profitability. Larger power sta- tions take much longer. The division's largest power station was shut down for a number of months in 2006 because of damage caused by an employee error. The employee had not received suf- ficient training. Gas Division." . . The Gas Division supplies natural gas to factories in Europe and North America. During 2006 this division entered into a complex sales agreement with a large com- mercial customer. The agreement guaranteed the customer a supply of gas at a sub- stantially discounted price over a 20-year period. As per GAAP financial accounting rules, the division recorded the discounted present value of the all future revenues during 2006. The price of gas tends to be volatile. Gas prices have increased 50 percent over the past 10 years. ... Prepare a report to the 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
