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Exam 17 August, questions and answers

Organisational Planning and Control (Macquarie University)

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SAMPLE EXAM PAPER ACCG301

Disclaimer
The objective of the sample examination and the revision materials therein is to assist students in their
preparation for the final examination. The sample examination is therefore similar in format to the
final examination. However, questions and topics in the final examination will be different, so students
should also revise all other learning materials, such as, lecture notes and tutorial exercises, and importantly
review the learning outcomes that are stated in the unit guide.

Unit Code: ACCG301

Unit Name: Organisational Planning and Control

Duration of Exam 3 hours plus 10 minutes reading time

(including reading time if applicable):

Total No. of Questions: 8

Total No. of Pages

(including this cover sheet):

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EXAMINATION INSTRUCTIONS:
All questions are to be answered on this question paper.

AIDS AND MATERIALS PERMITTED/NOT PERMITTED:

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Value Mark
Question 1 10
Question 2 12
Question 3 14
Question 4 11
Question 5 13
Question 6 18
Question 7 10
Question 8 12
Total 100

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Question 1 (10 marks)

Allie Haroum is the owner of a small independent café in Sydney. Her café serves the local inner-city,
which has an increasing number of female office workers. She sells high quality European and Middle
Eastern food. A larger food court has just opened across the street from her store. It sells American
and Australian fast food and offers lower prices on its food. It is a no-frills operation and its lower
prices are attracting business away from Allie’s café. Assume you are part of a student team assigned
to do a management accounting class project for Allie. Her question for the team is: “How can I apply
Porter’s generic business strategies to better deal with my strategic planning challenges in this
situation?” How will you reply?

Required:

1 Explain Porter’s three (3) generic (or competitive) business-level strategies to Allie. (4 marks)

2 Advise Allie on how she could apply Porter’s generic business strategies to better deal with
the strategic planning challenges in this situation. (6 marks)

Suggested Solution:

1.

Michael Porter suggests that in order to gain a competitive advantage in their markets, organisations
will pursue one of the following three business-level strategies:

Differentiation:

When using a differentiation strategy, a company focuses effort on providing a unique product
or service to a broad market, setting their offerings apart from competitors. This strategy allows
organisations to charge a premium price to capture market share and earn profits.

Cost Leadership:

When using a cost leadership strategy, a company focuses on gaining competitive advantage
by having the lowest costs and cost structure across their broad industry. There are many ways to
achieve cost leadership such as mass production, mass distribution, economies of scale, technology,
product design, input cost, capacity utilization of resources, and access to raw materials. Profits are
achieved by the high volume of sales rather than by charging premium prices.

Focused Differentiation / Focused Cost Leadership:

When using a focus generic strategy, a firm targets a specific, often narrow segment of the market.
An organization may also choose a combination strategy by mixing one of the generic strategies of
low-cost or differentiation with the focus strategy.

Focused Differentiation: Focus on providing a unique product to a narrow market for which a
premium price may be charged.

Focused Cost Leadership: Focus on having the lowest costs.

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2.

In this case, the large food court seems better positioned to follow the cost leadership strategy. So,
Allie should consider the other two alternatives in order to compete:
 Differentiation strategy:
 Involve trying to distinguish Allie’s food (European & Middle Eastern) from those of
the larger food court (Australian & American)
 May also involve providing better customer service – which may include a “frills
operation” (as opposed to a no-frills operation)
 Employing customer-oriented waitresses
 Providing a relaxing atmosphere
 Focus differentiation strategy:
 Might specifically target female office workers & try to respond to their tastes / needs
rather than the larger business community
 Could involve special orders (deliveries), other types of individualised services, more
of a customised approach & designing the store to better suit the needs of female
office workers (the target market)

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Question 2 (12 marks)

Versatile Electrics manufactures electrical instruments for a variety of purposes. The following costs,
related to maintaining product quality, were incurred in May:

Inspection of electrical components purchased from outside suppliers $24 000

Costs of rework on faulty instruments 38 000

Replacement of instruments already sold that were still covered by warranty 85 000

Costs of defective parts that cannot be salvaged 12 200

Training of quality control inspectors 10 000

Tests of instruments before sales 20 000

Required:

1 Prepare a cost of quality report similar to the report shown in Exhibit 16.11. (6 marks)

2 How do you think management should react to the relative size of the four categories of quality
costs? (4 marks)

3 Do you think that Versatile Electrics has identified all of its external failure costs? Explain.
(2 marks)

Suggested Solution:

1
Versatile Electrics
Cost of Quality Report for the month of May
Current month’s Percentage
cost of total
Internal failure costs:
Costs of rework on faulty instruments $38 000
Costs of defective parts that cannot be salvaged 12 200
50 200 26.5
External failure costs:
Replacement of instruments already sold, which
were still covered by warranty 85 000 44.9
85 000
Prevention costs:
Training of quality control inspectors 10 000 5.3
10 000
Appraisal costs:
Inspection of electrical components purchased from
outside suppliers 24 000
Tests of instruments before sales 20 000
44 000 23.3
Total quality costs $189 200 100.0

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2 Failure costs are 71.4 per cent of the quality costs, with external failure costs accounting for
44.9 per cent of the quality costs. The cause of the high failure costs is the lack of investment in the
prevention of defects (5.3 per cent). The fact that the customers discover a majority of the failures is
due to the low appraisal activity (23.3 per cent). External failure costs are far more costly than
internal scrap or rework as a poor experience by the customer can lead to the loss of customers and
a widespread perception of poor quality outputs when disappointed customers mention this to
others. Hence an underestimated external failure cost results from not including the impact from
losing future sales due to upsetting customers. The company should spend more on prevention to
reduce the failure costs. Perhaps investment on better equipment or higher quality inputs would
reduce defects. Since there can be a lag between investment in prevention and reaping its benefits,
appraisal could be increased to prevent defects from reaching customers. Ultimately, the increased
prevention costs should help to bring down both the internal and external failure costs and, in the
longer term, reduce the need for appraisal.

3 The external failure costs are likely to be underestimated as they do not include the lost
contribution on the goods that had to be replaced, nor the contribution on future sales that are
likely to be lost due to the company’s poor reputation. They also omit the costs of servicing these
customer complaints.

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Question 3 (14 marks)

Fabulous Enterprises manufactures modular kitchens and bathrooms and the Managing Director,
Alfred Jones, is concerned that the total number of suppliers has increased from 15 to 40 over the
past three years. He is sure that this is inefficient and has asked you as the new management
accountant to investigate this. You have decided to undertake an activity-based analysis of supplier
costs and supplier performance, and will focus initially on the three suppliers of wall and floor tiles.

After much discussion with managers and an analysis of costs and activities over the past year, you
have isolated supplier-related activities, identified activity drivers, and estimated the cost per unit of
activity driver:

Activity Cost per unit of activity driver

Order material $200 per order
Receive order $1500 per delivery
Inspect order $250 per delivery
Return material to supplier $210 per return
Downtime due to late delivery $260 per hour
Rework due to low quality tiles $50 per hour
Pay supplier $190 per invoice
Dispute invoiced amount $480 per dispute

Over the past year, the four suppliers of tiles consumed the following number of activities:

Activity A B C
Order material 20 50 30
Receive order 20 80 10
Inspect order 5 25 5
Return material to supplier 3 8 0
Downtime due to late delivery 20 60 10
Rework due to low quality tiles 11 10 0
Pay supplier 12 48 12
Dispute invoiced amount 2 0 13

A supplier relationship manager is employed to manage a range of suppliers, at a salary of $90 000.
The proportion of her time that she spends managing tiling suppliers is as follows: 10 per cent on
supplier A; 15 per cent on supplier B; 10 per cent on supplier C.

The cost of material purchased from each supplier over the past year was as follows: A $60 000; B
$120 000; and C $70 000.

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Required:

1 Calculate the total cost of ownership and the supplier performance index for each supplier.
(8 marks)

2 Discuss the relative performance of the suppliers. (3 marks)

3 Suggest three non-financial performance measures that could be used to assess the performance
of the tile suppliers. (3 marks)

Suggested Solution:

Supplier A Supplier B Supplier C

Activity No. of No. of No. of

Activity rate activities $ activities $ activities $

Unit level

Rework due to low quality tiles $50 11 $550 10 $500 0 $0

Downtime: Late delivery 260 20 5 200 60 15 600 10 2 600

Order level

Order components 200 20 4 000 50 10 000 30 6 000

Receive order 1 500 20 30 000 80 120 000 10 15 000

Inspect order 250 5 1 250 25 6 250 5 1 250

Return material to supplier 210 3 630 8 1 680 0 0

Pay supplier 190 12 2 280 48 9 120 12 2 280

Dispute invoice 480 2 960 0 0 13 6 240

Supplier related

Supplier relationship manager $90 000 10% 9 000 15% 13 500 10% 9 000

Total supplier activity costs 53 870 176 650 42 370

Purchase cost 60 000 120 000 70 000

Total cost of ownership $113 870 $296 650 $112 370

Supplier performance index 0.898 1.472 0.605

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2 Supplier C is clearly a more cost effective supplier to deal with than the other suppliers, with
an SPI of 0.605. Supplier B is the most expensive supplier, with a large number of orders, deliveries
and payments, and an excessive number of late deliveries that have resulted in downtime. There are
many opportunities here for Fabulous Enterprises to negotiate with Supplier B to set up new processes
to decrease the number of individual orders and to improve the quality of tiles delivered. If this is not
possible, assuming that the tiles supplied by the four suppliers are similar, then Fabulous may choose
to direct future orders to Supplier C.

3 Fabulous Enterprises could use the following criteria and non-financial measures to assess
the performance of the tile suppliers:

Criteria Measures

On-time delivery Percentage of orders delivered on schedule

Hours of downtime due to late delivery

Organisational change Adoption of EDI systems at supplier

Improvement in supplier productivity

Quality Percentage of orders rejected

Hours of downtime due to defective material

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Question 4 (11 marks)

Alfred Wood operates a factory that manufactures bread and cakes. One of the major raw materials
used is organic maize, which he buys for $5 per kilogram. The factory operates for 350 days each year.
The following information has been provided:

Annual usage of maize 80 000 kilograms

Average time between placing and receiving order 4 days

Estimated cost of ordering and receiving inventory (per order) $8

Estimated annual cost of carrying a kilogram of maize in stock $0.50

Required:

1 Use the above data to calculate: (4 marks)

(a) Economic order quantity (EOQ).

(b) Number of orders per year.

2 Wood has recently heard of just-in-time (JIT) purchasing, and wonders if he should use it in his
business. However, he is very concerned that the cost of placing frequent orders will be too high.
Explain the advantages of JIT purchasing and address specifically his concerns about cost.
(3 marks)

3 After a brief analysis of the cost of storing maize, including the cost of wasted space and
inefficiency, you have discovered that the annual carrying cost can be reduced to $0.20 per
kilogram. Wood has asked you to help him to negotiate a JIT purchasing arrangement with a major
supplier. After some discussion you have discovered that the cost of placing an order for maize
can now be reduced to just $2 per order. Calculate: (4 marks)

(a) New EOQ.

(b) New number of orders per year.

Suggested Solution:

1 (a)

(b)

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2 The advantages of JIT purchasing system include: lower inventory carrying costs; less risk of
inventory obsolescence, spoilage and theft; and elimination of non-value-added activities.

The main advantage of the JIT system is that inventory is not held in stock, but is ordered from
suppliers so that it arrives just when it is needed for production. This will reduce storage costs.
While the number of orders placed with suppliers under JIT increases, the costs per order can be
reduced through ordering inventory online, requiring suppliers to deliver at a specified level of
quality so that fewer inspections of deliveries take place, and allowing electronic ordering of
inventory and payments with suppliers.

3 (a)

(b)

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Question 5 (13 marks)

Pacific Telecommunications has two divisions and operates out of Auckland, New Zealand. The Express
Division manufactures and transfers a range of computer circuit boards to the Harris Division, which
uses those circuits to produce telecommunication equipment for the Asia–Pacific market. The Express
Division is operating at full capacity. One circuit board that it transfers to the Harris Division—Circuit
A569—has variable costs of $32 per 100 units, and it can be sold in the external market to other
companies in the computer industry for $40 per 100 units.

To produce its final product, the Harris Division incurs additional variable manufacturing and selling
costs of $65 per 100 units and sells the final product to the external market for $120 per 100 units.

The Harris Division has just been contacted by a Malaysian-based company that is offering a product
similar to Circuit A569 at the very competitive price of $28 per 100 units. The manager of the Harris
Division is very keen to take up this offer.

Required:

1 Calculate the transfer price for Circuit A569, using the general transfer pricing rule, assuming that
the Express Division has no spare capacity. (3 marks)

2 Recalculate the transfer price assuming the Express Division has spare capacity and has no other
opportunities for that capacity. Explain the likely transfer price if the company policy for transfer
pricing is variable cost plus 20 per cent. (2 marks)

3 Is it in the best interests of the company as a whole if the manager of the Harris Division purchases
its circuits from the Malaysian company rather than from the Express Division? Assume that the
Express Division has spare capacity. (6 marks)

4 As the manager of the Express Division what arguments might you use to encourage the manager
of the Harris Division to continue to source the product from your division rather than from the
Malaysian company? (2 marks)

Suggested Solution:

The $8 opportunity cost is the contribution margin that will be forgone by the Express Division if
Circuit A569 is transferred instead of sold in the external market. In this case the transfer price is
the same as the market price.

The opportunity cost is zero as the Express Division has no alternative use for its spare capacity.
While the minimum transfer price is $32 per unit, the Express Division would want to make a
profit on the transfer. The company policy of variable cost plus 20 per cent will lead to the
following transfer price:

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As the transfer price is less than the market price of $40, the Harris Division will be motivated to
purchase from the Express Division.

3
If the circuits are purchased from the Malaysian company:

Profit to Express Division will be zero.

Profit to the company as a whole = $27 per 100 units

If the circuits are transferred from the Express Division to the Harris Division:

Profit to company as a whole = $23 per 100 units

If Harris Division was to purchase the circuits from the Malaysian company, rather than from the
Express Division, its profits would increase by $10.40 per 100 units ($27 − 16.60). Overall the
company would be better off by $4 per 100 units ($27 − 23).

4 The issues that you might discuss could include the following.

(a) Will the supply from Malaysia will be of the right quality and be delivered on time?

(b) How long will the price remain at the low level?

(c) Will the Malaysian company be flexible enough to be able to respond quickly to last minute
orders or to changes in order quantity and timings, especially given their distant location.

(d) Will the Malaysian company be able to accommodate changes in product specifications
when they arise?

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Question 6 (18 marks)

Youngblood International has its head office in Brisbane, and operates throughout Australia, New
Zealand and parts of Asia. There are two main divisions: Newspaper Division, which owns leading
tabloid newspapers in several cities, and Brewing Divisions, which operates major breweries in Perth
and Brisbane.

Each division is headed by a managing director who has been given a high level of decision-making
authority. Each managing director effectively runs his or her division as a stand-alone business within
the general policy guidelines provided by the board of directors in the head office. Each managing
director agrees to achieve a series of targets: return on investment (ROI), market share and sales
growth. These targets are developed each year as part of the annual budget-setting process. Intense
lobbying takes place between each managing director and the board of directors to determine the
most suitable targets.

Each managing director receives an annual cash bonus based on achieving the target divisional ROI.
The company defines ROI as operating profit, before interest and taxes, divided by divisional assets
(measured at original cost less accumulated depreciation). If the ROI target is not reached, there are
no bonuses, and the managing director has to provide convincing reasons for the poor performance.
As a consequence of the performance measurement and reward system, the managing directors are
highly motivated to achieve—and exceed—their ROI targets.

Janice Cookson has just been appointed as the new management accountant in the head office,
charged with redesigning the performance measurement system. As her first task, she has obtained
the financial data for the last year and the latest forecast for the current year, for each division, in
thousands of dollars, as follows:

Operating profit Sales revenue Divisional assets

Last Current Last Current Last Current
year year year year year year
Newspaper 440 539 2588 2600 4400 4900
Brewing 950 1100 4750 4500 5000 6471

Leonard Smith, the managing director of the Brewing Division, is concerned that his ROI is likely to
suffer next year, as his main competitor has recently purchased new brewing technology. While his
own brewing equipment is only 10 years old, it is unable to produce the new variety of beers that
customers are demanding, and maintenance and operating costs are increasing.

Smith is considering a proposal to invest $10 million in new equipment. This will probably increase
next year's operating profit for his division by $1 million. Smith has analysed the future cash flows of
this proposal, and the new acquisition will easily satisfy the minimum required rate of return of 10%
for all new investments that is set for the Youngblood Group. Without this acquisition, Smith expects
his divisional profit ROI to be 14% next year.

Required:

1 Calculate the ROI for each division for last year and the current year, as well as the two
components of ROI: profit margin and return on assets. (6 marks)

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2 Explain why Leonard Smith is reluctant to invest in the new brewing equipment. Provide
calculations to back up your answer. (4 marks)

3 Janice Cookson is considering expanding the divisional targets to include a range of non-financial
measures. She is interested in developing a scorecard for each division. For the Newspaper
Division:

(a) Formulate objectives for each of the four perspectives: financial, customer, internal business
process and learning and growth. (4 marks)

(b) Suggest lag and lead indicators for these perspectives. (4 marks)

Suggested Solution:

1 Calculation of ROI (target):

Last year Current year

Newspaper 440 2588 539 2600

´ ´
2588 4400 2600 4900

17%  0.59 = 10.0% 20.7%  0.53 = 11.0%

Brewing 950 4750 1100 4500

´ ´
4750 5000 4500 6471

20%  0.95 = 19.0% 24.4%  0.70 = 17.1%

2 Leonard Smith is the managing director of the Brewing Division, which earned an ROI of 19%
last year and 17.1% for the current year. The new brewing equipment is needed for competitive
reasons. Without the equipment, the division’s ROI may drop to 14 per cent next year. However, if the
new equipment is acquired, it will also decrease the division’s ROI next year. The incremental ROI on
the equipment in year one is 10% (see calculations below). This is why Smith is reluctant to invest in
the new equipment. The effect on next year’s ROI from investing in the new equipment may be lower
than the 14% ROI expected if the equipment is not purchased. Smith should realise that in the longer
term it will be important to invest in the new equipment to prevent any loss of competitive position.

$1 000 000
Incremental ROI in year one: = = 10%
$10 000 000

If the new equipment is purchased and if we assume that profit and other assets are unchanged,
then the ROI for next year could be as low as 12.75 per cent:
$1 100 000  $1 000 000 $2 100 000
Next year ROI: = = = 12.75%
$6 471 000  $10 000 $16 471 000

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3 A variety of answers are possible, and it is important that the scorecards are tailored
specifically to the particular divisions.

Newspaper Division

Objectives Lag indicators Lead indicators

1 Financial
Improve returns to ROI Sales revenue growth
shareholders
Market share

Increase advertising Advertising revenue growth Number of regular

revenue advertisers

2 Customer

Increase customer Sales revenue growth Customer complaints

satisfaction
Market share Delivery on time

Increase circulation Number of new customers Regular newspaper

promotions

3 Internal business
processes

Improve efficiency of Cycle time Number of printing press

production processes breakdowns
Printing press downtime
Regular maintenance of
Delivery times
equipment
Number of delivery
complaints
Wastage of material

Reduce litigation Number of pending cases Number of legal complaints

4 Learning and growth

Improve skills levels of Number of ‘exclusives’ Employee days spent in

journalists training

Improve skills levels of Number of legal complaints New, more highly-skilled

legal department employees engaged

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Question 7 (10 marks)

Stamford Office Supplies is a small retailing business that sells stationery to businesses and consumers
in its local area. It has a Sales Office, a Warehouse and an Accounts Office, and employs around 10
workers.

Sales staff are paid a base wage and do not receive any performance-based bonuses.

Orders for stationery supplies are received from customers by the Sales Office via phone, fax or email
and are printed off throughout the day and filed in a tray on Jenny’s desk. At the end of each day Jenny
collects the printed sales orders, enters them into the computerised sales system, then delivers them
to the Warehouse so they can be filled and delivered to the customers.

Often the Warehouse boys are busy with receiving deliveries or packing shelves when Jenny delivers
the orders, so she helps out by picking the ordered goods off the warehouse shelves and packing them
in boxes ready for them to be delivered to the customers. The Warehousing staff appreciate her help
& in the past, when she has offered to update their system with the orders she’s filled for them, they
share their username and passwords with her to give her access to the inventory records.

Once the orders have been boxed, they sit in the dock until the courier arrives to deliver them to
Stamford’s customers. The dock is an open space so the couriers can back up their van, check the
paperwork stuck to boxes waiting in the dock and grab the delivery without needing to waste time
waiting for the Warehousing staff to sign the consignment notes.

Required:

1. Identify five lapses in control and explain why they would pose a risk for the business.
(5 marks)
2. Suggest an internal control for each risk, and classify each control as preventive or detective.
(5 marks)

Suggested Solution:

1.

a) Sales staff are not motivated to maximise sales since there are no incentive rewards – risk is
that revenues achieved are less than what could be generated;

b) No restriction of access to warehouse and inventory – employees from Accounts and Sales
have access – risk of theft of inventory;

c) Jenny can update both Sales and Inventory computerised systems – no segregation of
duties, may lead to theft of inventory or fraud;

d) Sharing of credentials – risk of fraud or theft of inventory;

e) No security over customer orders in the dock – couriers and any staff member could access
orders – risk of theft of inventory;

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2.

a) Produce a performance-based incentive programme to encourage and monitor

improvement in performance. Preventive (attempting to prevent poor performance),
detective (attempting to identify gaps between expected level of performance and actual
level).

b) Restrict access to Warehouse to authorised staff only – locked doors and swipe lock access.
Preventive (attempting to prevent theft of inventory or fraud).

c) Enforce segregation of duties – sales staff only have access to sales system, warehouse staff
only allowed access to inventory records. Preventive (attempting to prevent theft or fraud).

d) Enforce privacy of credentials – require passwords to be changed every month – preventive

(attempting to prevent unauthorised access to systems and fraud/theft); regular audits on
levels of access – detective (attempting to find instances of unauthorised access and
fraud/theft); provide training for those who continue to share credentials – preventive
(attempting to prevent future instances of credential sharing).

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Question 8 (12 marks)

Assume you are the newly appointed internal auditor for the Foleo Group. The Chief Executive Office
has asked you to assist her in assessing the organisation’s staff motivation levels and incentive
programs currently in place for the Foleo Head Office Marketing Department. As a result of your
investigations into the Department, you have uncovered a number of concerning personnel issues and
reported your findings as follows:

I met last week, with the Marketing Manager, to review the operations of the newly updated
internal controls across Head Office (H.O.). Included in this review were the mechanisms in place
that address and encourage employee performance, i.e. the various employee reward systems. In
addition to discussing the incentive scheme currently in place, we also identified some underlying
issues that I believe, are directly related to the poor levels of staff motivation at H.O., but more
specifically, within the Marketing Department. The Manager noted that in recent years,
absenteeism has been steadily increasing, as has staff turnover in his Department, which is
concerning. The introduction of new internal controls have effectively reduced the opportunities
for the theft (and subsequent sale) of customer data as well as supplier fraud, however, I believe
that these types of dysfunctional behaviours have been directly influenced by poor levels of job
satisfaction and motivation within the Marketing workforce. The Department Manager notes that
he has received a vast number of complaints over the years, from staff regarding their working
space, remuneration and career path opportunities. I read a selection of these emails which
suggest that the Marketing employees are concerned with the lack of opportunities for
advancement and bonuses offered to them in comparison with those offered to other Foleo
departments and business units. Those marketing employees who are directly involved with the
campaigns and promotions are offered bonuses on the basis of the sales that are generated from
their specific campaigns. This scheme has not been well-received by staff, since they feel that the
sales generated from marketing campaigns are not a true measure of the value of the campaigns.
They argue that the sales are dependent on many other factors outside the control of the
Marketing Department and typically, bonuses payments are rarely paid to the Marketing
employees. They feel that this is unfair, since many of the other departments and business units of
the Foleo Group receive regular bonuses. Also apparent from the emails, was the dissatisfaction at
the opportunities offered to Marketing employees for training and advancement, compared to
other areas within the organisation. Consequently, many of the staff believe that they need to look
outside Foleo to further their career, as is evident from the staff turnover statistics for the
Department over the last few years. For example, both the Finance and R&D Departments hold
monthly in-house training workshops to develop & update employee skills, while the Foleo Skills
employees are sent to annual external training courses to enhance their communication & teaching
skills. The staff are also highly critical of their workspace, arguing that they are “creative people
who need a workspace that inspires them”. Evidently, the Marketing employees align themselves
with the R&D Department and Foleo Scapps programmers in terms of the type of work they
undertake & feel that in comparison, their working conditions are far less conducive to creativity.
Many emails cite “Space Time” and “My Time” offered to the Scapps employees and the free-
flowing work environment of the R&D Department as innovations that would also be beneficial to
Marketing. When asked how he managed this level of dissatisfaction amongst his staff, the
Marketing Manager responded by pointing out the “Suggestion Box” in a corner of his office and
handing me a flyer containing information on the next Marketing Department’s Family Picnic.
These initiatives are a good start, however I’m not sure they have been all that effective to date.

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Required:

1. Using Herzberg’s Two-Factor theory, explain the low level of motivation in the Foleo H.O. Marketing
Department. (4 marks)

2. Using Expectancy theory, explain the low level of motivation in the Marketing Department.
(4 marks)

3. Using Equity theory, explain the low level of motivation in the Marketing Department. (4 marks)

Suggested Solution:

1.

It could be argued that Foleo Marketing have not provided their employees with sufficient hygiene
(or maintenance) factors, since the staff believe “their working conditions are far less conducive to
creativity” than others – this has increased employees’ dissatisfaction levels. Furthermore,
Marketing has not provided sufficient motivating factors, such as recognition through bonuses,
potential for advancement and opportunities for training (growth), all of which have negatively
impacted the employees’ satisfaction levels. Since Foleo Marketing have not provided adequate
hygiene and motivation factors, Herzberg suggests that the employees are poorly motivated in the
workplace and unfulfilled with their job.

2.

The Marketing employees do not believe that if they work hard and produce a quality marketing
campaign, that they will be able to achieve the required level of performance of them (i.e. the
required sales target, which is outside of their control), so the E-P expectancy will be broken. There
is no evidence to suggest that Foleo has withheld bonuses in the past once the sales targets have
been met, so employees would believe that bonuses would be paid if the sales target is met, so the
instrumentality or P-O expectancy will be positive. There is sufficient evidence to suggest that the
Marketing staff value the outcome or the bonuses offered, so the valence is positive. Since all 3 of
these links are not positive, i.e. the E-P expectancy is broken, Expectancy theory suggests that
motivation levels have been negatively affected, which supports the assessment that motivation is
low in the Marketing Department.

3.

There is sufficient evidence to suggest that the Marketing employees do not feel equally treated,
since they have not been offered the same opportunities (for achieving bonuses, furthering their
careers or creative workspaces) as staff from other areas of the business. Using Equity theory, this
perceived inequity has unfortunately, resulted in Marketing staff becoming demotivated which has
resulted in poor performance, high staff turnover and absenteeism and some staff attempting to
equalise the situation by committing theft/fraud.

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