Enager Industries Inc.

Case Study

1. McNeil’s proposal was rejected because the proposal did not have a 15% return which

was required by Hubbard. Enager Industries Inc. missed the opportunity to increase its

EPS of the company due to incorrectly setting a target rate for all three of their divisions.

See Schedule 1 for explanation.

2. There is a shift from profit center concept to investment center concept because of three

reasons. Comparing absolute differences in profit is not meaningful. There is a difficulty

in comparing profit performance unless assets employed are taken into account. Lastly,

the business unit managers have two performance objectives. The first is to generate

profits from resources used. The other, is to invest in additional resources only if it

produces the appropriate return. Also, Hubbard and Randall used ROI to measure the

assets employed. The pitfalls of this are decisions in a company that increase a center’s

ROI may decrease its overall profits. Also, that ROI provides different incentives for

investments across business units.

3. Randall and Hubbard should use EVA for measuring and controlling the assets

employed. EVA is when you multiply Capital employed by the difference between ROI

and Cost of capital. The advantages of EVA are different interest rates may be used for

different types of assets and EVA has stronger positive correlation with changes in

company’s market value. Also, all business units have same profit objective for
comparable investments.

Schedule 1
Product A Product B Product C
Number of units 100000 75000 60000
Selling Price per unit $ 18 $ 21 $ 24
Total sales 1,800,000 1,575,000 1,440,000
Variable cost per unit $ 9 $ 9 $ 9
Total variable cost 900,000 675,000 540,000
Total fixed cost 510,000 510,000 510,000
Cost of Goods Sold 1,410,000 1,185,000 1,050,000
Net Income 390,000 390,000 390,000
Total asset base ($) 3,000,000 3,000,000 3,000,000
Return from proposal 13% 13% 13%