Reta Sharfina Tahar

1111002006
Case 5-1
Profit Center Problems
Questions:
1. AMAX automobiles
How should AMAX be organized and controlled?
2. Indus Corporation
In each case, how should Indus be organized and controlled?
Answers:
1. 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 divisions, we make standard and rule of law. So we
can control the workers job. The organization also should have made a survey to
predict the amount of market demand.
2. Case A: the organization should have increased the performance by motivating the
employees. The organization can increase employees innovation in order to grow up
production synergy across the various product lines.
Case B : the organization should have increased their performance by motivating
their employees. 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 C : 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 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
Questions:
1. Evaluate each of the concerns expressed by top management, and if necessary,
make recommendations appropriate to the circumstances described in the case.
2. What is your overall evaluation of Abrams management control system? Describe
any strengths or weaknesses that you identified but did not include in answering
the previous question. What changes, if any, would you recommend to top
management?
Answers:
1. 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:
1) The ROI behavior
2) Transfer pricing disputes
3) Operational trouble shouting
Abrams use book value for fixed assets which inflate the ROI measure as the
assets age. ROI based bonus may rob the future, who want to invest in assets if
that reduce the bonus. To use RI or EVA instead of ROI and to control the
investments separately using NPV and capital turnover measures. 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.
2. 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, 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.
Strengths:
The company has a clear management structure.
The company has employed a bonus plan for employees.
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.
Weaknesses:
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.
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.