Posted: July 12th, 2016
Calculate net operating income and residual income for each division.
Jack’s Outdoor World is a company that manufactures and sells garden furniture. They have been operating for the past ten years and have a comfortable share of the market. The company has four divisions, namely the garden shed division, the outdoor table division, the outdoor chair division and the garden swing division.
Jack Armstrong, the CEO of the company, has been reviewing the performance of the company. Jack has noticed that the outdoor swing division’s manager, Barry Wright, has consistently failed to attain his budget target, while the managers in the other three divisions have always successfully met their budgets targets. Jack is perplexed about Barry’s performance as Jack has known Barry since they were in high school and it was Barry who suggested that Jack should start this business. Without Barry’s help and support, Jack would not have been able to build the company into the successful business that it is today. To recognise Barry’s contribution to the business, Jack made Barry a shareholder in the company three years ago. Concerned that his friendship with Barry might affect his judgement, Jack has called you into his office for an urgent meeting. As the Management Accountant, Jack has asked you to investigate the outdoor swing division’s performance.
1) Is a division that fails to meet its budget targets less successful than a division that does? Briefly explain your answer.
2) The managers in the other three divisions are always successfully meeting their budget targets. Is that a concern? What are the three methods used by managers to achieve their budgets that are harmful to the company?
3) What can you do to guard against the three methods identified above?
4) Write a recommendation to Jack on what he should do.
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