Performance report.
France Inc. has two divisions: Bastille and Versailles. This question concerns Bastille Div.
Bonuses for the division managers are based on a formula that
(1) compares the two division's ROIs to award one part of the total bonus, and
(2) evaluates the individual division's variances from their own budget to award the second part of the bonus.
Some information on the divisions is as follows:
- The divisions are completely decentralized.
- All (100%) of Bastille's sales are to the other division: Versailles. Bastille's original purpose is to make and supply Versailles with components it requires.
- Versailles is 10 times larger than Bastille.
Below are the detailed accounts used to calculate the ROI measure and the variances (ie differences) for Bastille.
Bastille Division.
Performance report
For the year ended December 31, 2015
Actual results Original (Master)
2015 Budget for 2015 Difference
Production data
Units produced 2,400 2,300 100 4.3%
Financial Data ($000)
Sales $138,000 $162,800 (24,800) (15.2%)
Production cost of units sold
Raw materials $32,000 $40,000 (8,000) (20.0%)
Labor $41,700 $53,000 (11,300) (21.3)
Factory Overhead $29,000 $37,000 (8,000) (21.6%)
Cost of units sold $102,700 $130,000 $(27,300)(21.0%)
Other costs
Headquarter charges for:
IT services $228 $210 18 8.6%
Administrative services $425 $440 (15) (3.4%)
Headquarter costs $300 $525 (225) (42.9%)
Total other costs $953 $1,175 $(222) (18.9%)
Adjustments to Income
Unreimbursed fire loss 0 $52 ($52) (100.0%)
Losses due to raw
materials deterioration $125 0 125 -
Total adjustments $125 $52 $73 140.4%
Total expenses and deductions $103,778 $131,227 (27,449) (20.9%)
Division income $34,222 $31,573 $2,649 8.4%
Division investments $92,000 $73,000 $19,000 26.0%
(defined as net book value of Property, Plant, and Equipment)
Return on Investment 37% 43%
(Div Inc / Div investments)
Some additional information on the Bastille costs are:
Corporate practices include:
Headquarters does all personnel and accounting work for the divisions.
IT services are allocated based on sales dollars; head office administrative expenses are allocated based on total expenses paid.
Headquarter costs are costs of CEO, CFO, etc. salaries and personnel and accounting work; these costs are split between divisions based on size.
Divisional administration expenses are included in the manufacturing fixed overhead costs.
The Division Investment dollars equal net book value of the fixed assets for the division. It should be noted that the divisional managers have the authority and responsibility to manage these fixed assets as well as accounts receivable and accounts payable. Divisional managers do not have authority and responsibility for inventory, marketable securities, and remaining other current working capital accounts.
Also, divisional investment includes a building that has not been used for decades because headquarters has ordered it held for future use.
As well, the minimum rate of return for the company is 20%.
Required.
- What is the residual income for Bastille? Defend the ROI or residual income measure as most appropriate for part (1) of the bonus for France Inc.'s Bastille Division.
- Criticize the components of the performance metric for Bastille. Use bullet form, but make sure a brief justification for your criticism is clear and concise. For example, you will note that the comparisons (ie difference calculations = variances presented) are to original budget. Is this a valid criticism and why is it valid (what's the issue in this particular example)? ... As another example, should "Losses due to raw material deterioration" be included in the performance metric? ... Then continue looking at the other detailed pieces of this performance metric calculation for other criticisms.
Please provide 7 criticisms.