The Star Paper Division of Remington Inc. is located outside Los Angeles. A major expansion of the division's only plant was completed in April of 20A. The expansion consisted of an addition to the existing building, additions to the production-line machinery, and the replacement of obsolete and fully depreciated equipment that was no longer efficient or cost effective.
On May 1, 20A, G. Harris became manager of Star Paper. Harris had a meeting with M. Fortner, vice-president of operations for Remington Inc., who explained to Harris that the company measured the performance of divisions and division managers on the basis of return on capital employed. When Harris asked if other measures were used in conjunction with return on capital employed, Fortner replied, "Remington Inc.'s top management prefers to use a single performance measure. There is no conflict when there is only one measure. Star Paper should do well this year now that it has expanded and replaced all its old equipment. You should have no problem exceeding the division's historical rate. I'll check with you at the end of each quarter to see how you are doing."
Fortner called Harris after the first quarter results were completed because Star Paper's return on capital employed was considerably below the historical rate for the division. Harris told Fortner that return on capital employed was not a valid measure for Star Paper. Fortner indicated that this opinion would be passed on to corporate headquarters, and any feedback would be passed back down to Harris. However, there was no further discussion of the use of return on capital employed at the end of the second and third quarters. Now that the year has ended, Harris has received the following memorandum:
To: G. Harris, Star Paper Division
From: M. Fortner, Remington Inc.
Subject: Divisional Performance
The operating results for the fourth quarter and of our fiscal year ended on April 30 are now complete. Your fourth quarter return on capital employed was only 9 percent, resulting in a return for the year of slightly under 11 percent. I recall discussing your low return after the first quarter and reminding you after the second and third quarters that this level of return is not considered adequate for the Star Paper Division.
The return on capital employed at Star Paper has ranged from 15 to 18 percent for the past five years. An 11 percent return may be acceptable at some of Remington Inc.'s other divisions, but not at a proven winner like Star Paper, especially in light of your recently improved facility. Please arrange to meet with me in the near future to discuss ways to restore Star Paper's return on capital employed to its former level.
Harris is looking forward to the meeting with Fortner to pursue the discussion about the appropriateness of return on capital employed as a performance measure for Star Paper. While the return on capital employed for Star Paper is below historical levels, the division's profits for the year are higher than at any previous time. Harris is going to recommend that return on capital employed be replaced with multiple criteria for evaluating performance, namely, dollar profit, receivable turnover, and inventory turnover.
Required:
(1) Identify general criteria that should be used in selecting performance measures to evaluate divisional managers.
(2) Describe the probable cause of the decline in the Star Paper Division's return on capital employed during the fiscal year ended April 30, 20B.
(3) On the basis of the relationship between M. Fortner and G. Harris, as well as the memorandum from Fortner, discuss apparent weakness in the performance evaluation process at Remington Inc.
(4) Discuss whether the multiple performance evaluation criteria suggested by G. Harris are appropriate for the evaluation of the Star Paper Division.