Beach Foods

A) A strength of using EVA as a divisional performance measure is that it is good at decision making.
This is because it directly links to shareholder wealth which is the main objective for Beach Foods to
achieve.
Another strength is that it will motivate the managers of Beach to work in the best interests of the
company as any gain in the shareholder value will also have some benefits for them in the form of
incentives or bonuses.

Another strength is that its consistent with NPV and any increase in last year’s EVA means that
shareholder value has been added. It also aligns Beach’s long-term objective to managers and
therefore stops dysfunctional decision making.

EVA stops manipulation of profits as there are numerous adjustments made to accounting profit.
EVA also capitalizes development costs which discourages short term decisions by the management.
At Beach R&D is significant thus, EVA is more appropriate to use.

One of the disadvantage of using EVA is that it is complicated to make all the adjustments and Beach
will have to employ finance experts for deriving accurate EVA. This will increase costs and impact on
shareholder value.
Another disadvantage of EVA is that it uses WACC which has its own limitations and may not reflect
the risk of the divisions of Beach which is being evaluated. Also, as an unlisted business, the
estimation of WACC is difficult.

Another disadvantage is that EVA would not help to judge relative divisional managerial performance
at Beach if the divisions are not of similar size.

Also, EVA is based on historical data and does not provide much insight into the future. So, the Board
of Beach might have to use it with the NPV to get to the shareholder value and therefore it proves to
be time consuming.

B) Baby ROI & RI

In $ millions:
Revenue 220
Costs (121)
Controllable profit 99
Research & Development (11)
Head office fee (28)
Profit before tax 60

ROI:

Controllable profit = 99/424 = 23.3%

Uncontrollable profit = 60/424 = 14%
RI:

Controllable profit = (99 - (11% x 424)) = $ 52.36 million

Uncontrollable profit = (60 – (11% x 424)) = $ 13.36 million

Main assumption used in above calculation is the profit figure of Baby division. Controllable profits
are the ones that the management can be questioned on. However, if R&D is requested by the
manager of that division, then it must be assessed on the cost of R&D . In other words, controllable
profit will then be after deducting R&D.
Although RI & EVA are positive, there is more information required to assess if the value has actually
been created or not. This might include a comparison to a similar company in the industry, but the
basis of this assumption must be known.

C) Baby division

Being the star of the group and having higher growth than other divisions it will be feasible to make it
a profit centre. However, it is unclear where the decision to commit to a new product rests as the
R&D division actually does the development work.
As this division is growing rapidly, budget constraint and non-accounting might not be appropriate as
it would not help the division with creativity. Therefore, profit conscious approach might be feasible.

Chocolate division

Being the cash cow of the group, it can be run as a profit centre where it will be run from the profit it
generates. It can also be run as an investment centre as it was mentioned in the scenario about the
delay in approval. This is only if they can justify the investment.

The management style should be budget-constrained with special emphasis placed on the ability of
the division to generate cash not just profit.
R&D division

As there is no direct revenue being generated, it can be classified as a cost centre. However, the
value of the division will only be appreciated if the overall profit generated from these new products
can be shown.

A budget constrained approach will be valid where the budget will be set for each project and will be
controlled. A fixed budget however will not be appropriate as it will stop the culture of innovation at
Beach.

A specific approach will therefore need to take account of all these factors in order to arrive at a style
of management which meets the needs of the company as a whole.
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