Global Enterprises, Inc. uses a number of performance criteria to evaluate its overseas operations, including return on

Question:

Global Enterprises, Inc. uses a number of performance criteria to evaluate its overseas operations, including return on investment. Compagnie de Calais, its Belgian subsidiary, submits the performance report shown in Exhibit 10-13 for the current fiscal year (translated to U.S. dollar equivalents). Included in sales are $500,000 worth of components sold by Compagnie de Calais to its sister subsidiary in Brussels at a transfer price set by corporate headquarters at 40 percent above an armslength price. Cost of goods sold includes excess labor costs of $150,000 owing to local labor laws. Administrative expenses include $50,000 of headquarters expenses, which are allocated by Global Enterprises to its Belgian affiliate. The parent company holds all of its subsidiaries responsible for their fair share of corporate expenses.

Local financing decisions are centralized at corporate treasury, as are all matters related to tax planning. At the same time, Global Enterprises thinks that all subsidiaries should be able to cover reasonable financing costs. Moreover, it thinks that foreign managers should be motivated to use local resources as efficiently as possible. Hence, Compagnie de Calais is assessed a capital charge based on its net assets and the parent company€™s average cost of capital. This figure, which amounts to $120,000, is included in the $162,000 interest expense figure. One-half of the exchange gains and losses figure is attributed to transactions losses resulting from the Belgian subsidiary€™s export activities. The balance is due to translating the Belgian accounts to U.S. dollars for consolidation purposes. Exchange risk management is also centralized at corporate treasury. Required: Based on the foregoing information, prepare a performance report that isolates those elements that should be included in performance appraisals of the foreignunit.