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Drawem Company's evaluation of Bildem Company performance

Drawem Company purchased Bildem Company three years ago. Prior to the acquisition, Bildem manufactured and sold electronic products to third-part customers. Since becoming a division of Drawem, Bildem now manufactures electronic components only for products made by Drawem's Macon Division.
Drawem's corporate management fives the Bildem Division management considerable latitude in running the division's operations. However, corporate management retains authority for decisions regarding capital investments, product pricing, and production quantities.
Drawem has a formal performance evaluation program for all divisional management teams that relies substantially on each division's ROI. Bildem division's income statement provides the basis for the evaluation of its divisional management (See the following income statement)
The corporate accounting staff prepares the decision's financial statements. Corporate general services costs are allocated on the basis of sales dollars, and the computer department's actual cost are apportioned among the divisions on the basis of use. The net division investment includes division fixed assets at net book value (cost less depreciation), division inventory, and corporate working capital apportioned to the divisions on the basis of sales dollars

Required:
a. Discuss Drawem Company's financial reporting and performance evaluation program as it relates to the responsibilities of Bildem Division.

b. Based on the response to requirement (a), write a memo to management recommending appropriate revisions of the financial information and reports used to evaluate the performance of Bildem's divisional management. If revisions are not necessary, explain why.

DRAWEM COMPANY
Bildem Division
Income Statement
For the year Ended June 30
(in thousand)

Sales Revenue $8,000
Cost and expenses:
Product Cost:
Direct material $1,000
Direct labor 2,200
Manufacturing overhead 2,600
Total $5,800
Less: Increase in inventory 700 5,100
Engineering and research 240
Shipping and receiving 480
Division administration:
Manager's office $420
Cost management 80
Human services 164 664
Corporate cost:
General services $460
Computer 96 556
Total costs and expenses $7,040
Divisional operating profit $960
Net plant investment $3,200
Return on investment 30%

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a. Discuss Drawem Company's financial reporting and performance evaluation program as it relates to the responsibilities of Bildem Division.

Bildem Divisions sales are all "transfer prices."? That is, they do not sell to the market any longer. Therefore, while prices may be at the market levels enjoyed three years ago, it is not clear that they are still at market prices. And management can adjust prices at any time and divert profits into or away from this division into another division. Further, since the entire capacity is consumed internally, the Bildem Division has no responsibility for marketing and establishing customer relationships. And production levels are decided above the division level. So, the sales revenue line is neither something the division manager can control or something that he/she created and should accrue to their benefit. They can a captured ...

Solution Summary

Your tutorial is 475 words and suggests that Bildem switch from an investment center to a cost center with reasons and examples to support the change.

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