Introduction
Divisions in a firm or company have become a necessity in the business world due to the growing complexity and size of companies. Decision-making in many companies is delegated by top management to division managers. This comes with both advantages and disadvantages. It may create more motivation amongst division managers, be a training aide for managers to move up through the company, expedite decision-making and customer services, and gives power to those who deal with the everyday operations of each division. However, with this delegation of responsibility comes the possibility that the division mangers will not keep the best interests of the company in mind and lead to lack of coordination and managers becoming estranged to the company’s overall strategy. To prevent this from happening, upper-management may implement a system of performance measures. Divisional performance is based on three measures that evaluate the divisions and division managers of a firm. The performance of each division is evaluated by measuring divisional income, return on investment, and residual income.
Divisional Performance Section
“Divisional income is a measure of divisional performance that is analogous to corporate net income for evaluating overall company performance.” (Caplan ch. 22) It is best used when comparing the same division’s performance over previous periods. It is not a good measure to compare performances of various divisions of differing sizes. Divisional income is calculated just like net operating income or the earnings before interest and taxes. When divisional