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ABC Corporation has 3 plants across the United States in 3 different regions consisting of East
ABC Corporation has 3 plants across the United States in 3 different regions consisting of East, Central, and West. Last year, each plant purchased new equipment for their plants, and each plant earns the same income of $200,000. However, each plant required a different investment in assets as follow:
Plant Investment Amount East $2,000,000 Central $2,500,000 West $1,600,000
Based on the data given, address the following tasks:
1. Discuss the result and the performance of each plant based on the income alone. 2. Compute and provide the return on investment (ROI) for each plant. Discuss the purpose of this calculation, and provide specific interpretation/evaluation of results (e.g., which plant is doing better/worse, which plant is using equipment more efficiently, etc.). 3. Identify the importance of responsibility accounting in leadership. 4. Propose specific solutions to the plant managers on how to control costs and improve revenue. Please be sure to be specific with the recommendations.
That's a great set of questions for analyzing plant performance. Here is the breakdown of the results, calculations, and recommendations for ABC Corporation.
1. Discussion Based on Income Alone 💸
When evaluating the plants based on income alone, the result is misleading and fails to reflect true performance.
Plant
Income
East
$\$200,000$
Central
$\$200,000$
West
$\$200,000$
Result and Performance:
Based purely on the $\$200,000$ income earned by each plant, all three plants appear to be performing equally well. However, this analysis is incomplete because it ignores the amount of investment (assets) required to generate that income. Using income alone gives a false sense of efficiency and equity among the regions.
2. Return on Investment (ROI) Calculation and Interpretation 📊
Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or to compare the efficiency of different investments.
ROI Computation
Plant
Income
Investment (Assets)
ROI Calculation
ROI
East
$\$200,000$
$\$2,000,000$
$\$200,000 / \$2,000,000$
$\mathbf{10\%}$
Central
$\$200,000$
$\$2,500,000$
$\$200,000 / \$2,500,000$
$\mathbf{8\%}$
West
$\$200,000$
$\$1,600,000$
$\$200,000 / \$1,600,000$
$\mathbf{12.5\%}$
Purpose and Interpretation
The purpose of the ROI calculation is to measure how effectively an investment center (like a plant) is using its assets to generate profit. It directly links income with the assets required to produce that income.