Reference no: EM132566523

Nehru Gupta is the controller at the Acme Shoe Company, a large manufacturing company located in Franklin, Pennsylvania. Acme has many divisions, and the performance of each division has typically been evaluated using a return on investment (ROI) formula. The return on investment is calculated by dividing profit by the book value of total assets.

In a meeting yesterday with Bob Burn, the company president, Nehru warned that this return on investment measure might not be accurately reflecting how well the divisions are doing. Nehru is concerned that by using profits and the book value of assets, division managers might be engaging in some short-term finagling to show the highest possible return. Bob concurred and asked what other numbers they could use to evaluate division performance.

Nehru said, ''I'm not sure, Bob. Net income isn't a good number for evaluation purposes. Because we allocate a lot of overhead costs to the divisions on what some managers consider an arbitrary basis, net income won't work as a performance measure in place of return on investment.'' Bob told Nehru to give some thought to this problem and report back to him.

Questions:

Question a. Explain what managers can do in the short run to maximize return on investment as calculated at Acme. What other accounting measures could Acme use to evaluate the performance of its divisional managers?

Question b. Describe other instances in which accounting numbers might lead to dysfunctional behavior in an organization.

Question c. Search the Internet and find at least one company that offers an information system (or software) that might help Nehru evaluate his company's performance.