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 increase 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

Transfer pricing disputes

Operational trouble shouting

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

Name: Nurul Sari

NIM: 1101002048

Home Work Case 5.1 and 5.4

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,

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.

Name: Nurul Sari

NIM: 1101002048

Home Work Case 5.1 and 5.4

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.

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.

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

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

Name: Nurul Sari

NIM: 1101002048

Home Work Case 5.1 and 5.4

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.