Case study for Chapter 10

Eight years ago Paco set up a greetings card company, Calder Calloway Cards Ltd. The company
buys in card designs from freelance designers and then prints, assembles and packs the cards for sale
to retailers. Paco started out on a small scale; he and his brother Pedro bought up some card designs at
low prices from struggling art students, printed them in runs of about 1 000 and then went round card
shops selling them in small quantities. The business did very well, largely due to the brothers flair in
spotting good, commercial, card designs, and their abilities as salesmen. Initially, Paco owned 60% of
the company, Pedro owned 30%, and the remainder of the shares was held by other family members.
However, the company gradually needed more capital to expand and the brothers sold off some of
their shares to a couple of wealthy private investors, Walter and Jennifer. Pedro, although he still
owns some shares and remains as a director of Calder Calloway, has moved on to start another
business in selling advertising space. The private investors do not take an active part in the
management of the company, but they are both very experienced and Paco quite frequently uses them
as sounding boards for new ideas. Over the last two years they have both tried to persuade Paco to
hire some expert managers. About a year ago, Walter and Jennifer had a meeting with Paco which
proved to be a turning point. Although Paco lost his temper and accused them of trying to ruin his
business, he was eventually brought round to accepting that the company had grown too big for him
to manage alone.

Jennifer: Look, Paco, youre the boss, and were not trying to dictate to you, but the
companys just too big and complex now to be run by just one person. You need some help if
youre going to be able to stay on top of things.
Walter: And it is getting out of hand. Im concerned to see that the gross profit margin for
20X6 has fallen yet again thats the third year running. Just how are you planning to tackle
that little problem?

During 20X7 Paco accepts the inevitable, and uses the services of a recruitment consultancy to
appoint a sales director, Tracey, and a production director, Karim, both of whom have a lot of relevant
experience. The first formal meeting of the new board is on 1 February 20X8, exactly one week since
the two new directors took up their appointments. Pacos plan was that they would have a few days to
settle into their new responsibilities and then the board would be in a position to have an effective
formal meeting to discuss ideas about future plans for the company.
Both new directors have submitted details of some new ideas for consideration at the meeting.
Traceys list includes:

1
Use with Business Accounting and Finance 3rd edn (ISBN 9781408018378)
Catherine Gowthorpe, 2011 published Cengage Learning EMEA

Introduce a commission scheme for the sales force [who are currently on fixed
salaries] based on the extent to which their actual performance exceeds budget
performance

Concentrate sales efforts on the more profitable ranges of cards

Karims list includes:

Invest in some new printing equipment. The existing equipment is out-of-date; it

keeps breaking down and staff report that the printing is often of such poor quality
that a lot of work-in-progress has to be simply thrown away.

Employ some designers to work full-time for the company. This would help to ensure
that the company had a constant stream of new designs, and would help to establish a
corporate design approach which is lacking under the present haphazard system of
buying in designs.

The directors discussion of these points proceeds as follows:

Paco: Well, this idea about the commission could work, but I dont quite see what you mean
about actual performance as opposed to budget performance
Tracey: I mean the sales budget in terms of the number of units youre budgeting to sell in a
given period. You could break the overall number down into an expected sales volume for
each person in the sales force; if he or she exceeds that they get rewarded by a commission.
You can make the scheme as complex as you like, really. In one company I worked for they
had an seller of the month scheme. If you won it three times the company paid for a luxury
weekend break that kind of thing.
Paco: But we dont have a sales budget. People just sell what they can its always
worked that way in the past and weve done pretty well.
Tracey: Well, I was wondering why I got blank looks when I asked to see the sales budget.
Are you telling me you dont set budgets?
Paco: This is a very successful company. We dont need to bother with a lot of extra
paperwork.
Karim: Well, what about management information generally? Dont you have any
management accounting systems at all?

2
Use with Business Accounting and Finance 3rd edn (ISBN 9781408018378)
Catherine Gowthorpe, 2011 published Cengage Learning EMEA

Paco: Well, no, why would we? It would just mean employing a load of expensive
beancounters. Ive got no time for accountants. The book-keeper does an excellent job and the
accountant comes in to do the final accounts once a year, and keep us out of trouble with
HMRC. Thats good enough for me.
Tracey: But if thats the case we really cant consider either of my suggestions, can we? I
want to concentrate on selling the more profitable ranges of cards, but how am I going to find
out which ones are more profitable if we dont have any information?
Paco: Er
Karim: And what about production? I cant make a decision about buying a new machine
unless I can compare projected costs of using the new machine with the costs of the existing
set up. Please tell me, at least, that you monitor the design costs. If were going to employ
designers I need to compare the costs of employing them against the costs of buying in a lot
of separate designs.
Paco: Oh, well, the annual costs are all included in the income statement, you see. Heres the
draft income statement for 20X7 the accountants just finished it. Hell do a summary one to
send to Companies House, but this ones really quite detailed look, theres a figure for
design costs Im not quite sure whats in it, but I expect it includes all the costs of paying
for the designs.
Tracey: But what puzzles me is how you keep on top of whats going on in the business.
How do you know what your production costs are? How can you tell if theyre getting out of
hand? Did you know, before Karim told you, that a lot of the production simply goes to
waste?
Paco: Look, I know what youre saying. You want me to fill the place up with overpaid
accountants wholl waste a lot of time and money telling me things I know already. When
you work in a business long enough you get a feel for whats going on. I dont need a lot of
management reports to tell me that.

The meeting degenerates into a prolonged argument. Tracey and Karim try to persuade Paco that a
business of the size of Calder Calloway needs a sound system of management information. Paco, on
the other hand, is opposed to spending (he uses the term wasting) money on gathering information
that wont tell him anything that he doesnt already know.
What are the arguments for and against the provision of management information for a
company like Calder Calloway Cards Limited? What kind of management information is required?
Why is it needed?

3
Use with Business Accounting and Finance 3rd edn (ISBN 9781408018378)
Catherine Gowthorpe, 2011 published Cengage Learning EMEA