HomeWork MCS-Nurul Sari (1101002048) - Case 5.1 5.4

Name: Nurul Sari NIM: 1101002048 Home Work Case 5.1 and 5.4 Case 5.1: AMAX Automobiles

1. How should AMAX be organized and controled?

According to my opinion, when organization made divisions, automatically the organization made profit centers, because every divisions has its own jobs and each jobs has been delegated. In each division, we make standard and rule of law. So we can control the worker ’s job. The organization also should have made a survey to predict the amount of  market demand.

Case 5.1: Indus Corporation

1. In each case, how should Indus be organized and controlled?

Indus was a diversified company operating in a number of niche markets that were largely independent of each other, that is, customer buying decisions in each of these markets were made independently. The company’s primary basis for competitive advantage in each

of these markets was to be the first mover (and leader) in product innovation. The company faced the following customer/production situations: Case A:

The customer was mainly performance sensitive rather than price sensitive. Also, there was little production synergy across the various product lines. Solution:

According to my opinion, the organization should have increased the performance

by motivating the employees. The organization can increase employee’s innovation in

order to grow up production synergy across the various product lines. Case B: the customer was mainly performance sensitive rather than price sensitive.

However, there was considerable production synergy across the various product lines Solution:

According to my opinion, the organization should have increased their

performance by motivating their employees. In this case, there was considerable

Name: Nurul Sari NIM: 1101002048 Home Work Case 5.1 and 5.4 production synergy across the various product lines. It means that the changed information in this organization is good, so the employees can i ncrease their innovation. Case C: the customer was equally sensitive regarding product performance and price.

However, there was little production synergy across the various product lines. Solution:

According to my opinion, the organization should have increased the performance

by motivating the employees. Besides that, the organization has to press its products expense. So the organization can decrease its price products. Case D: the customer was equally sensitive regarding product performance and price.

However, there was considerable production synergy across the various product lines. Solution:

According to my opinion, the organization has to press its products expense in

order to decrease its price products. In this case, there was considerable production synergy across the various product lines. It means that the changed information in this organization is good, so the employees can increase their innovation.

Case 5.4: Abrams Company

1. Evaluate each of the concerns expressed by top management, and if necessary, make recommendations appropriate to the circumstances described in the case.

The Abrams case is about using profitability measures to evaluate profit centers. The case also reflects a long academic debate in the US-literature about ROI problems. In EU companies it is more common to evaluate PCs with Income measures like RI and EVA. This case covers the tree main problems in controlling profit centers: 

The ROI behavior

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Transfer pricing disputes

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Operational trouble shouting

Name: Nurul Sari NIM: 1101002048 Home Work Case 5.1 and 5.4 It is very difficult to find a relevant and fair capital base for the ROI measure. Abrams use book value for fixed assets which inflate the ROI measure as the assets age . The age and

mix of assets also differs among divisions which give unfair measures. It is also easy for the divisions to manipulate the capital base at the end of the year. ROI based bonus may rob the future, who want to invest in assets if that reduce the bonus.

I recommend this company to use RI or EVA instead of ROI and to control the investments separately using NPV and capital turnover measures. The bonus should be based on the budgeted income level, the RI target. The problem with the inventory level can not be controlled with ROI management. If the company change to RI/EVA it will be possible to to negotiate relevant inventory levels in the budget process. High inventory levels can also be managed with differentiated capital charges that will create high interest costs . The best way to control operational tasks is to us non financial measures such as inventory turnover. Use non financial measures to

control the inventory levels. If it is an strategic issue you can connect this measure to the bonus system.

2. What is your overall evaluation of Abrams’ management control system? Describe any strengths or weakness that you identified but did not include in answering the previous question. What changes, if any, would you recommend to top management?

In general, Abrams Company adopts the lowest cost, differentiation, market focus and ROI strategies to accomplish the organization’s goal. Furthermore, In order to implement the

strategies the firm establishes its own management control systems. Evaluation of Abrams’ Management Control System:

The current measurement system of the company is ROI. The ROI target is set based on budget profit divided by actual beginning of the year net assets. Actual ROI is calculating by actual profit divided by actual beginning of the year net asset. The advantage of the Abrams Company ROI system is it does not consider the investment added during the year,

Name: Nurul Sari NIM: 1101002048 Home Work Case 5.1 and 5.4 because the investments provide little effort to the year, but more benefit to the future. However, the ROI measurement system has some weakness, such as defer asset replacement, short-term focus at the expense of long-term. The incentive compensation plan of Abrams Company is bonus plan, and it calculate accurately based on an equation, and it seems equal for all members. In addition, some adjustments also are made associate with the performance of the managers. The performance is measured by compare of actual profit and budget profit. However, all the measurement is associate with data, sometimes the performance will be influence by variance elements, such as, economic environment, the demand level, material price, cost of labor, and government policy, so the measurement need to improve in some areas. The dollar amount of corporate bonus pool was established by a fixed formula linked to company earning per share. This incentive compensation plan can be considered as a reward system. Using this method the company can increase or maintain motivation. STRENGTH : 

The company has a clear management structure.

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The company has employed a bonus plan for employees.

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The AM Marketing division will input products form the other three divisions, and sell it to domestic and foreign market, it helps the company save cost when it input internal.

WEAKNESS: 

The Abrams Company has three totally independent divisions, and the three divisions are lack of connection. They purchase their materials separately, and they carried excessive inventories most of the year. Also, inside sales sometimes need a negotiation on price, the may lead to low productivity.

SUGGESTIONS TO PERFORMANCE MEASUREMENT SYSTEM: 

ROI: can be used combination with other performance measures to avoid the limitations of ROI. The company can establish a non-financial performance

Name: Nurul Sari NIM: 1101002048 Home Work Case 5.1 and 5.4 measurement system such as the balanced scorecard .With a good performance measurement system, the incentive compensation plan will be improved. 

EVA ( Economic value added): can be used instead of ROI Suggestions to transfer pricing… A transfer price fixed by the top management in compliance with the AM

division and the other divisions involved which could be revised when it is out of date. This fixed price could be adjusted due to inflation. There should be an internal policy on it. Therefore, top management should implement a cost-based transfer prices because when competitive prices are not available, transfer prices may be set on the basis of cost plus a profit markup. RECOMMENDATION:

The non-financial performance measurement system should be established. The balanced scorecard is a good choice for company measure performance. With a good performance measurement system, the incentive compensation plan will be improved.