Chapter 5 Case 5-4. Abrams Company Case Overview Abrams has a division for each product group parts.

Each division led by vice president and general manager who is expected to reach a certain target ROI. Each products division has a sales department OEM. The rest of the product produced by the division of the product sold to the AM division. AM division operates several warehouses parts distribution have company in the U.S. and overseas markets. Each manufacturing plant in the third division of the products have annual targets to be achieved. Each sale of OEM products division traced to the factory that makes parts. The target ROI based budget income divided by net assets beginning of the year (calculated by total assets minus current liabilities). For the plant manager, the award is given on earnings variance factory. In this case any adjustment variance gross margin generated from sales volume to the AM division. The manager was not given a bonus of the profits from sales to the division AM and was not given a penalty if the actual purchase AM division is less than the amount approved by the AM division when the budget is approved by the annual earnings of the factory upper management. There are three things to be thinking of upper management, namely: There is always strife on the transfer price of the parts were sold by product division to the AM division, Management feels that the product divisions often treated AM division as a consumer which is not free, and Upper level management felt the excess inventory throughout the year in each division. Analysis and Discussion The three things that concern the company's senior management Abrams are: The first problem is the transfer pricing dispute between the three product divisions with AM divisions, especially on parts that are sold exclusively to the AM division. This is one of the weaknesses in the regulation of the business unit as a profit center. Disputes will increase because of the debate over the appropriate transfer price. Although sometimes these disputes can be resolved by the vice president of finance, this can affect the performance and efficiency of the company. Moreover, internal sales has its share of 20% of total sales of $ 100 million from $ 500 million and future sales AM division is also targeted at 50% of total sales. Those products are also sold to OEM that transfer price is the price of the OEM market. Tansfer price for this product is not

a problem as both sides feel the price is fair. The problem is the parts were sold exclusively to the AM division. The second problem is the attitude that prioritize OEM products division than the division AM in sales. It is also due to setting business unit as a profit center which decision making authority shifted from top management to the lower level so that the division can not sell to the AM division. Divisions from Abrams losing the same goals that overall company goals. Division products can optimize the profit its divisions at the expense of the company's overall profit. In addition, the company's compensation programs do not encourage internal sales. The plant manager was only given a bonus for sales outside of the company and no bonuses and penalties for the underpayment for internal sales. This leads to a tendency OEM products division precedes the AM division. Third problem is excess inventory in each division. Excess inventory can be caused by production or marketing decisions wrong, poor quality of goods and so on. In addition, the assessment of performance using only as a measure of ROI is also inaccurate. Moreover, investments or assets are measured only at the beginning of the year so that excess inventory during the year was not questioned or considered by the plant manager because at the end of the year, inventory is also reduced as are the Christmas holidays. Management control system in the Abrams Company still need to change towards the better. The advantages of the company's control systems are: (1) Profit center portion burdened overhead costs companies and divisions. In the Abrams company, costs are allocated based on the budget so that the division manager will not complain of injustice or lack of control over the allocation of those costs. In addition, each division had sales of each department so it was easy to trace costs to each plant, (2) The existence of a compensation plan based on earnings per share. Employees will be motivated to improve the performance of the company to increase earnings per share will also increase incentives or bonuses. So the realization of goal congruence, (3) Compensation for the plant manager of the difference of income that will encourage plant managers to maximize profits, (3) Abrams divisions have products such as parts and the different sales departments respectively. Lack of interaction between divisions facilitate the imposition of responsibility and performance measurement except AM divisions. The weaknesses of the company's control systems are: Plant manager compensation based only on profit and ROI evaluation will encourage managers to prioritize short-term gains at the expense of long-term profitability. Example to increase profits and meet the target, the manager could have removed the cost of R & D, training costs, lower product quality, and so on. Organizing the business unit as a profit center make decisions to decentralized and simple

disputes and unfair competition. Upper level management will lose some control. Moreover, there are divisions Abrams product which is a result of the acquisition. Conclusion Upper level management Abrams Company concerned on transfer pricing disputes, products division behaviors that prioritize OEM than the AM division and excess inventory in each division. Management control system in the company Abrams also needs to be improved further to overcome the difficulty of organizing the business unit as a central responsibility for profit. Recommendation The need to change the existing compensation plan in which plant managers also get a bonus for internal sales to encourage managers to sell to the division AM. The need to change the existing compensation plan in which plant managers also get a bonus for internal sales to encourage managers to sell to the AM division Management of the Abrams company needs to limit things that require strategic considerations, the uniformity (eg accounting method) and so on. Each division has carta each containing production and marketing activities and should not be allowed to seize business other business units. Upper level management must be involved in maintaining the goals congruance and integrity of the organization..