A brief summary chapter seems to help students consolidate their previous topic-by-topic learning, and they appreciate such a chapter for final exam study preparation. The summary of the many different adjectives placed before the word “cost” and the concepts behind these adjectives is useful. However, because there is no conceptually new material here, one need not spend much time on the text. Rather, instructors can jump right into a discussion of one of the chapter’s cases, which is intended to raise issues that cut across multiple chapters.
Cases Puente Hills Toyota raises many financial responsibility center, performance measurement, and incentive systems issues in a car dealership setting. Axeon N. V. illustrates the real world application of many management accounting and control concepts, including incremental cost analysis, capital budgeting, sensitivity analysis, transfer pricing, organization design, and control system administration. Case 27-1: Puente Hills Toyota Note: This case is unchanged from the Twelfth Edition. Purpose of Case
This case can be used to motivate discussions of a number of topics, including financial responsibility centers, performance measurement, transfer pricing, and incentives. The setting is an automobile dealership, a business about which all students have some interest and understanding. And the setting is real, so students can benefit from secondary learning about the industry and business. Suggested Assignment Question Evaluate the performance measurement and incentive systems use at Puente Hills Toyota. What changes would you recommend, if any? Discussion
The Essay on Puente Hill Toyota
Puente Hills Toyota (PHT) is a large Toyota dealership which is owned by the corporation Hitchcock Automotive Services. PHT is situated in city of industry, California, about 25 miles east of Los Angeles. PHT offers a wide variety of new and used cars (this is unique in the industry). Furthermore they offer Toyota incentives, service specials, and Toyota parts savings. The annual profits of PHT ...
The case illustrates clearly that financial responsibility centers exist in great variety. While textbooks describe the possible generic responsibility centers as cost centers, revenue centers, profit centers, and investment centers, this case shows some of the variance that can exist within these generic categories. The general sales manager is held accountable for net profit. Obviously, the dealership also keeps track of balance sheet items, but the dealership general manager’s incentives do not seem to consider them. So is the general manager an investment center manager?
Regarding performance measurement: The departments are profit centers, but not all costs are allocated to them. They are more like “gross profit centers. ” The salespeople are held accountable for gross profit on the deals they initiate, so each salesperson is also a little profit center. The service advisors are paid on commission, so each advisor is a revenue center. The service technicians, though, are paid for work accomplished. It is useful to discuss why some seemingly uncontrollable indirect costs are allocated to departments (see Exhibit 3).
These allocations are mandated by Toyota, so that they can compare dealership departments on a common basis that treats each department more or less as a standalone business. Allocating the costs also gives the department managers information as to what services are being provided for them, and it gives them some power to complain if the size of the allocations becomes too high. This issue can lead into a discussion of the differences between authority and responsibility (accountability).
Generally, managers are held accountable for results in areas where they have authority.
But here, the general sales manager’s bonuses are based on performance measured in terms of profit after overhead allocations (line 59 in Exhibit 3).
This is an example of a situation where this manager is held accountable for areas over which he has less than full authority. Conversely, the service manager’s bonuses are based on the department’s gross profit performance, which is before allocations. It is apparent in the case that some of the measures can be gamed. Puente Hills Toyota managers worry about the gaming in the service area, and they seem to have adequate controls over these behaviors.
The Business plan on J & G Garden Center: Lawn Care Services Division
This combination of land acquisition and building construction resulted in very low overhead for the business, which contributed to their start-up success. An addition to the building completed in 1991 included several new and related product lines such as garden tools, soils and mulch products, gifts, seeds, and related accessories. Gloria had earned a horticulture degree at the local community ...
The Customer Satisfaction Index (CSI) measure is also gamed. But here the managers seem to encourage the gaming because it makes the dealership look better to Toyota. Does the dealership need an un-gamed CSI measure for its own management purposes? How will they get accurate information about problems if and when they exist? Transfer pricing of service jobs done for internal customers (particularly the used car department) is done at market prices. The alternative would be to give the internal customer a discount, or perhaps even to transfer at cost. What would happen under that alternative?
It would shift profits from Service to Used Cars. It would also provide little incentive for Service to do internal work. Puente Hills Toyota transfers at market prices because they want to measure each department as a stand-alone business and they want to have the Used Car Department get as much priority in the Service area as any other customer. The measurement focus in this business is on profit measures. Do profit measures provide a good indication of value creation in the car retailing business? The answer here is probably yes. This is primarily a short-term business.
Dealerships are not making many investments that involve large lags between time of investment and payoff (e. g. , R&D), and they are not creating many intangible assets. The one exception is customer goodwill, so it is not surprising that Toyota mandates that considerable effort also be devoted to the measurement of CSI. Some useful class discussion can focus on the structure of the incentive plans. Depending on the focus of the class and the class time available, the instructor can have the students complete an incentive plan matrix. On a whiteboard, list any or all of the key incentive plan elements.
With adequate time, I use the following: 1. Who is included in the plan? 2. Form of payment 3. Frequency of payment 4. Measure(s) and their importance weighting 5. Performance standards 6. Shape of reward/performance function 7. Size of reward (expected, maximum) 8. Funding (e. g. , is there a company bonus pool constraint? ) 9. Uniformity (are people in the same role treated the same? ) In an array of columns, list the roles for which the instructor wants to clarify the incentive system. These might include the general manager, general sales manager, service manager, salespeople, service advisors,
The Business plan on Malincho Case Study Analysis
Kalin is a Bulgarian entrepreneur. He tried to establish a business from a scratch. This case is about a start up business and challenges arising out of a new business.Kalin were an inexperience entrepreneur but his determination led him to success, starting with scares resources. Kalin a Bulgarian national, started a new business as a fresh graduate he don’t have any savings. He started his ...
service technicians. Among other things, this analysis will show that: – The payments are all in cash – The payments are timely (monthly) – The bonuses are paid by formula; there is no bonus pool constraint – There are no performance standards except in the service technician area where standards are set by Toyota. Internally set budgets are used to calibrate the payoff function, but goal-setting does not seem important in this business. – The service manager reward/performance function is kinked upward to encourage beating the budget. – The rewards are quite lucrative.
The assignment question asks students for an evaluation of the system, which requires them to identify good and bad points about it. In addition to the points raised above, they might mention the following: (-) There are no deferred compensation elements that might provide retention and tax benefits. (-) This is an incentive system that would require the company to pay sizable bonuses even if the company is losing money. (-) There is no bonus for teamwork. How much teamwork is necessary? The case mentions one area that could be improved—service referrals to sales. (?
) Is the company paying too much? Answering this question would require knowledge of industry benchmarking. Some of these data are provided in the case Appendices. Puente Hills Toyota’s practices seem in line with other dealerships. (? ) The bonuses are all formula-based. Would it be useful to allow some subjectivity in case unforeseen events unfold? Generally, however, this measurement and incentive system probably must be considered as effective. Much of this system is dictated by Toyota, and this is an industry and company that has refined its systems over the years.
The Research paper on Nta Case Analysis
NTA & PEP Case Analysis The nuclear tube assembly room is a production unit of the American Radiatronics Corporation, one of the leading producers and an early pioneer in the nuclear electronics industry. This case deals with the approach of a manager Ralph Langley which lead to a massive improvement in the productivity of the department and about the methods are being considered to be put ...
And within the Toyota family, Puente Hills Toyota is a top performer. Case 27-2: Axeon N. V. Note: This case is unchanged from the Twelfth Edition. Purpose of Case The Axeon N. V. case was written to illustrate the effects of a management control system and the supporting management processes on one specific, major decision in a decentralized, multinational corporation. The situation, which is real, but disguised, illustrates the real world application of many management accounting concepts, including incremental cost analysis, capital budgeting, sensitivity analysis, and transfer pricing.
But perhaps more importantly, the case is about managing the cost/benefit tradeoffs that are inherent in a decentralized firm. The case illustrates some common management process problems involving conflict between a parent and its foreign subsidiary. Visible in the case are common attributes of managerial behavior in a decentralized organization. The attributes are both positive (motivation, initiative) and negative (suboptimization, parochialism, indecisiveness).
Dealing with these behaviors forces students to consider issues about organizational design and control system administration.
Because of the breadth of issues raised, this is an excellent review case. Many students will become emotionally engaged in the situation and, hence, the case becomes a good vehicle for discussing the advantages and disadvantages of decentralization and the problems faced in administering a control system in a decentralized environment. Suggested Assignment Questions 1. Is construction of the new factory in the U. K. in the best interest of Axeon N. V.? 2. Ignoring your answer to question 1, if the plant were not built and AR-42 was shipped from the Netherlands to the U.
K. , what transfer price would be appropriate? 3. What should Mr. van Leuven do? Case Analysis A. Product Sourcing Alternatives Despite the existence of many relevant data in the case, the answer to the first assignment question is not an easy one. There are two alternatives for producing AR-42: U. K. and Netherlands. The best place to start is with the discounted cash flow analysis, a summary of which is presented in Exhibit 2 of the case. Case Exhibits 3 to 5 provide back-up detail. The analysis is straightforward, and it presents no computational difficulties.
The Term Paper on Cost-Benefit Analysis of Three Gorges Project
Cost-Benefit Analysis of Three Gorges Project Shen Bojiu China is working on the controversial Three Gorges project. Are such projects economically justified? 1. Introduction The Three Gorges Project (TGP) in China is the largest hydro project in the world. The project was first proposed by Sun Yat-sen in 1919, and 84 years later, in 1993, the project has started its construction. The TGP has ...
The new-factory project shows a positive net present value using an 8% rate, which seems to be the marginal borrowing rate for Hollandsworth in the U. K. And the project shows a 15% IRR, which is above Axeon’s 12% hurdle rate. So, based on these analyses, the project looks worthwhile. Was there anything wrong with this initial analysis? The analysis looks sophisticated, and most students will instantly empathize with Mr. Wallingford. However, criticisms can be made of his analysis: 1. The end-of-project recovery value of equipment and working capital is a surrogate for the cash flows after the end of seven years.
It is likely that this is biased downward. Why would all sales and profits stop after that date? Is there no learning that has come from this project? Does the project have no option value? 2. Wallingford might well have presented some sensitivity analyses, reflecting more pessimistic forecasts. These might have headed off some of the criticism that came later from Axeon’s director of sales. 3. Most importantly, although he appears to be taking a corporate perspective and, hence, comes across as an appealing character with whom most MBA students will identify, Wallingford is really parochial.
He did not consider the investment opportunity using a corporate-focused perspective. Wallingford is indignant about Axeon managers’ rejection of his idea, but he is not as innocent as he portrays himself. The main defect in his analysis was his failure to consider the alternative of manufacturing in the Netherlands. The main missing information in his original proposal was this implicit benchmark. Wallingford might also have proposed a two-step approach to selling AR-42 in the U. K. He could have demonstrated the size of the U. K.
market using imports from the Netherlands, and then later proposed to save the shipping and duty costs by manufacturing in the U. K. Instead, he chose the more self-centered approach of going it alone from day 1. Why didn’t Wallingford present this alternative? Probably because he wanted to run his own plant (build his own empire).
So we see in the case that the Dutch managers argue that producing the AR-42 in the Netherlands is an even better alternative than that proposed by Mr. Wallingford. Some of their arguments question some of the numbers in the Hollandsworth analysis. The Axeon director of sales (Mr.
The Essay on Jonhson Matthey case study analysis teacher guide
Suggested resources & activities related to PEST analysis and Johnson Matthey Full Johnson Matthey case study MP3 of the Johnson Matthey case study External influences PowerPoint Johnson Matthey crossword Johnson Matthey word search Suggested timings for the session 10 mins 5 mins 5 mins 10 mins 20 mins 10 mins Starter e.g. Johnson Matthey crossword Use the external influences PowerPoint to ...
De Rijcke) questioned the sales forecasts. But who understands the U. K. market better, the local general manager or the functional specialist in a foreign country? The Axeon director of manufacturing (Mr. Oosterling) questioned both the U. K. facility’s ability to handle the manufacturing and the cost assumptions. Students should think about his statements regarding costs. The fixed costs are already sunk, so they are not relevant to the analysis. The analysis of the variable costs (as shown in Exhibit 6 of the case) is misleading. As shown in Exhibit-TN 1, an average variable cost of ?
1860 on the full 1000 tons of production implies an incremental variable cost of ? 1800 on the additional 400 tons for U. K. sales. This incremental variable cost is the relevant cost when comparing the two investment proposals. So Mr. Oosterling has overstated his case. Next, the instructor can turn to the discounted cash flow comparisons. Exhibit-TN 2 shows an analysis of the Netherlands proposal. The revised analysis still favors the Netherlands proposal, mainly due to the much greater initial investments for the U. K. proposal. U. K. Proposal Netherlands Proposal Net Present Value @ 8%? 916,000? 1,288,790 Internal Rate of Return20%26%
In addition, taking into account the higher risks involved in the U. K. startup relative to the Netherlands expansion, the U. K. hurdle rate should be higher, which makes the Netherlands alternative even more attractive. On the other hand, sensitivity analyses would show that the U. K. managers could face significant sales shortfalls and manufacturing problems and still have a project with a positive net present value. In terms of that criterion, or even the Axeon 12% hurdle rate criterion, perhaps the impact of the startup complications are not as significant as the Axeon functional managers believe them to be.
Further, the irrelevance of the fixed costs in the Netherlands proposal makes sense only if the Netherlands has, and will always have, excess capacity for producing AR-42. In other words, the assumption of zero opportunity cost of the fixed plant is valid only if the Netherlands capacity is greatly overbuilt. If this is the case, it suggests problems with Netherlands capacity planning in the past. The longer the time horizon, the better the U. K. proposal looks. Other issues such as nationalism and perceived autonomy are also important. Axeon N. V. is increasingly embracing a philosophy of decentralization.
Therefore, even if the U. K. proposal is not optimal, forcing manufacturing of AR-42 in the Netherlands will undercut the perceived decentralization in the company. Another consideration is the nationalistic sentiments of the English. This is suggested by the requirement of a majority of local directors for the Hollandsworth board and the threatened resignation of Mr. Nobel. An increase in duties on AR-42 is likely if the U. K. viewed Axeon as exploiting the U. K. market from the Netherlands. Finally, Mr. Wallingford is known to be enthusiastic and innovative.
If he feels that he has less autonomy than before and all the benefits go to the Netherlands, his enthusiasm and innovative spirit are bound to suffer. He might be less committed to developing the AR-42 market in the U. K. And, based on his outstanding performance at Axeon, opportunities for Mr. Wallingford to leave Axeon for a competitor are probably abundant. Can Axeon afford to lose him? B. Why did Mr. van Leuven behave as he did? It is easy to be critical of Mr. van Leuven in this case. He caused much of the problem because he did not manage the process very well.
He should learn that in some situations he should refrain from comment when he is exposed to early-stage proposals at board meetings. His early encouragement in this situation, which he subsequently reversed, caused much of the disappointment from the Hollandsworth personnel. Mr. van Leuven was also representing Axeon at the Hollandsworth board meeting. Ideally, he should have proposed the alternative of sourcing from the Netherlands early in the decision-making process. Much of Mr. van Leuven’s behavior in the case was designed to find a way out of a problem that he probably knew he had caused. C. The Transfer Pricing Issue
If the AR-42 for the U. K. is sourced from the U. K. , then the analysis is complete. However, if AR-42 is supplied from the Netherlands to the U. K. , then a transfer price must be established. There are a number of transfer pricing possibilities: 1. Market price. This would award most of the “profit” to the producer, in this case, the Netherlands. 2. Cost, or cost plus a mark-up. Cost can be defined anywhere from incremental variable cost to full cost, and the mark-up can be variable (a fixed amount per unit) or a lump sum (to compensate the Netherlands for costs of the increased working capital and the use of its capacity).
3.
A two-book system. This would involve crediting the Netherlands at market price but charging the U. K. only the variable cost. This would make both divisions happy, presumably, but it would lead to a double counting of profits and require a corporate elimination. In many decentralized companies, managers would allow the division managers to negotiate a fair transfer price. But in this case, because of the friction already generated between personnel in the U. K. and the Netherlands, negotiation may not be possible. So here Mr. van Leuven probably has to choose a transfer pricing method and a means of implementing his decision.
The total contribution per ton of AR-42 is as follows (using figures from year two and following): Selling price ? 3,700 Variable costs (1,800) Shipping (100) Duty (100) Contribution per ton ? 1,700 Each transfer pricing method allocates this contribution between the U. K. and the Netherlands. What transfer pricing/profit sharing arrangement is best? There is no correct solution. Transfer prices provide one way of shaping managerial behavior. If centralized production is deemed to be the strategic focus, then a transfer price giving more of the profits to the Netherlands will best signal this emphasis.
But if top management wants to reward local market sensitivity and initiative, then a transfer price that passes most of the profits on to the U. K. is best. A thoughtful analysis of the transfer pricing issue will lead to a discussion of broader strategic questions. D. “Fit” Between Strategy, Organization Structure, and Control Systems At this point in the class discussion, it is useful for the instructor to ask the following question: What is Axeon’s corporate strategy? Can you tell from the case what the key success factors are for Axeon? The case does not provide much information about Axeon’s critical success factors.
What is most critical for Axeon—identifying new applications and markets or producing at low cost? The case does not provide a clear answer to this question. However, one thing that is clear is the trend in Axeon’s international expansion and in its organizational structure. Exhibit TN-3 illustrates this trend. Axeon used to have a centralized, functional organizational structure, but the firm is moving to greater decentralization to take advantage of geographical expertise in each of the areas in which it operates. Should the company’s critical success factor(s) affect decisions about organizational structure and management control systems?
Clearly yes. This observation can lead naturally into a discussion of the pros and cons of decentralization vs. centralization. Generally speaking, the advantages of centralization include economies of scale and technically skilled employees. On the other hand, decentralization leads to better relationships with local governments, sensitivity to the local market, and local managers’ higher perceived autonomy. Exhibit TN-3 summarizes the trade-off between flexibility and efficiency as the level of decentralization increases. Two points are worth noting:
1) Market sensitivity is enhanced with increased decentralization. Also, a decentralized manufacturing firm with a larger number of smaller facilities enables greater production flexibility. 2) Economies of scale decrease with increased levels of decentralization. This is because a decentralized organization loses the cost savings from shared management overhead and larger, more efficient plants. In summary, Axeon is facing two sets of pressures: | |Centralization Strategy |Decentralization Strategy | |Key success factor |Low cost |New product applications | |Key function |Production |Marketing |
|Responsibility Centers: | | | Production |Investment center |Cost center (captive) | | Marketing |Revenue center |Profit/Investment center | To some extent, Axeon’s control system is a compromise between full decentralization, which would use highly autonomous local investment centers, and full centralization, which would have the local organizations be only marketing outposts, revenue centers. We also see in the case that the current reward system includes a bonus based entirely on the local division results. This seems to reinforce the decentralization strategy.
Alternatively, even under a decentralization strategy, a bonus might be based partly on company-wide profits to promote cooperation between divisional managers. A reward system can reinforce a chosen strategy as well as compensate for the weaknesses of the chosen strategy. So Axeon seems to be gradually embracing decentralization. Both the line and the staff organizations have significant power (decision rights).
The friction we see in the case is typical of a matrix organization where country managers like Wallingford are often at odds with functional specialists at headquarters.
Mr. van Leuven has to play an integrator role. He should smooth over the rough spots that will inevitably arise. E. What should Mr. van Leuven do? There is no correct solution here; there are only pros and cons. The options are to source in the U. K. , source in the Netherlands, or delay. Delay means possibly source in the U. K. after the viability of the market has been demonstrated. Asking students to vote as to their preference will reveal significant differences in opinion. This vote, if one is taken, should come very late in the class.
While it appears that the economics of this decision favor the Netherlands, our own take is that the decision in this case should probably favor the U. K. If a decentralized organizational structure is appropriate for Axeon, as it appears to be, then decentralization must be allowed to work. Motivate the local managers to take initiative, and reward them for taking that initiative. The Hollandsworth proposal exceeds the established hurdles, so allow Hollandsworth managers to proceed with their plan. If students recommend the seemingly superior economic choice of sourcing the production,
then they should just be made to understand the negative motivational effects that choice will have on the motivation of the U. K. managers, and possibly even their successors. Longer-term, Axeon might try to implement a more sophisticated analytical procedure so that the right alternatives are properly addressed in proposals such as that analyzed here. What happened? In the real world situation, the Hollandsworth project was rejected. The transfer price was set at ? 3700, so the full cost to Hollandsworth (including shipping and duty) was ? 3900. Initially Hollandsworth managers tried to sell AR-42 at a price of ?
4500 per ton, but the volume sold was miniscule. Eight months later they lowered the price to ? 4200. The annualized rate of sales went to 150 tons, and Hollandsworth managers thought that the potential was there for annual sales of 200 tons at that price. Four months later they lowered the price to ? 3700. The annualized rate of sales went to 270 tons. With this result, the Hollandsworth managers thought that they had clearly demonstrated the potential for annual sales of 400 tons at that price. Axeon began an increased push to sell AR-42 in other parts of the world.
Quickly they filled the capacity of the plant in the Netherlands. Hollandsworth eventually got permission to build a plant in the U. K. Mr. Wallingford did not leave the Hollandsworth immediately. Instead, he focused on other issues and continued to be a highly successful manager. Some years later, Mr. van Leuven was promoted. Mr. Wallingford was offered Mr. van Leuven’s job, but he turned it down because he wanted his children to be educated in the U. K. Soon after having made that decision, he was offered a position of managing director of a larger U.
K. company, and he accepted that offer. Student Takeaways Students can learn a lot from this case. They can practice their technical skills, such as those required to do net present value analyses, and they can apply their transfer pricing theories to a real world-like situation. But perhaps most importantly, by seeing that what appears to be a good investment is not made and understanding why not, students can see that the process of management is more intriguing and more complicated than it usually appears in textbooks. Pedagogy
Many students see this case as difficult. Some amount of floundering with the numbers is useful, but if the floundering continues, instructors should be prepared to step in and help clarify the analysis. That understanding is essential before moving on to the more qualitative aspects of the case. Suggested timing in a 75-minute class is as follows: 40 min. The plant investment decision 15 min. Transfer pricing alternatives and behavioral effects 15 min. The fit between the existing control system and the company’s strategic priorities 5 min. What happened/summary
