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 income statement of Dexter division provides the basis for the evaluation of Dexter’s divisional management.

The corporate accounting staff prepares 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.

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.

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DEXTER DIVISION OF ATCO COMPANY INCOME STATEMENT FOR THE YEAR ENDED OCTOBER 31, 20XX (IN THOUSANDS OF DOLLARS) Sales Costs and expenses $4,000 Direct materials Direct labor Factory overhead 500 1,100 1,300 2,900 350 Total Less: Increase in inventory Cost of goods sold Engineering and research Shipping and receiving Division administration: 2,550 120 240 Manager's office Cost accounting Personnel 210 40 82 Total division administration 332 Corporate headquarters costs Computer General services 48 230 Total corporate headquarter costs 278 3,520 480 Total costs and expenses Divisional operating income Net plant investment Return on investment $1,600 30%