Practice Q1 (week 7) (Traditional Performance Measurement) solution

(a) What type of work units are the Devices and Digital Clock divisions? Explain why
Bannister uses this type of organizational structure and describe two (2) benefits
that the company gain from this type of structure

(8 marks)

 Devices and Digital Clock divisions are market based work units (2 marks)
 Reasons for market-based structure (2 marks)
 Bannister exploits different technologies to produce a) integrated systems; b)
digital clocks
 The company wants to enhance customer responsiveness
 Market-based structure – benefit (Discuss any two. Discussion must be related
to the case) (2 marks per benefit only if the discussion relates to the case study)
 Co-ordination of activities is easier – most/all activities are within the division
 Division managers tend to become more widely trained.
 Employees are dedicated to one product/line which means they are able to
understand better customer needs –

(b) Discuss the degree of decentralization at Bannister.

(8 marks)

Students should note that

 Decisions related to R&D, purchases, marketing and manufacturing are

delegated to divisional managers.
 However, decisions related to HR, legal activities and investment are
centralized because they are taken by the top.

(c) Explain how the Devices Division manager can improve his Return of Investment
(ROI).
(9 marks)

 The manager can improve ROI by increasing either or both of its components
(Return on Sales and Investment turnover) (3 marks)
 ROS can be improved by a) increasing sales prices while selling less quantity
and thereby incurring lower cost of goods sold expense or b) decrease
operating expenses. Here students can also say that decreasing operating
expenses can sometimes signal performance manipulation, as in the case of
putting off maintenance expenses. (3 marks)
 To obtain an improved Investment turnover a manager would need to either
increase sales or reduce the division’s invested capital. The manager of the
Devices Division can lower invested capital by reducing inventories. (3 marks)

(d) Indicate the type of responsibility centre that is most appropriate for each of the
following sub-units of the Devices Division:
 research and development sub-unit;
 purchasing sub-unit;
 sales sub-unit;

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  manufacturing sub-unit.
(8 marks)

(2 marks each. 0 marks if engineered or discretionary is not mentioned)

 research and development sub-unit: discretionary cost center

 purchasing sub-unit: engineered cost center
 sales sub-unit: discretionary cost center (also revenue centre is acceptable)
 manufacturing sub-unit: engineered cost center

(e) Outline and discuss the problems you believe may exist when attempting to
measure the performance of the legal services sub-unit.

(8 marks)

The legal services sub unit is a discretionary cost centre. This implies that

o No standards can be determined: what is the output of the legal services sub
unit? Number of cases solved? Number of contracts signed? Contracts (or
cases) may differ in terms of length and difficulty thus making difficult the
creation of a standard.

o Input-output relationships cannot be identified: For instance, we cannot

measure by how much productivity would increase if the unit hires a new
employee.

o No “optimal” level of expenditure can be determined: this really depends on

the disputes the legal unit is dealing with.

o As a consequence, performance measurement in a discretionary cost centre

like the legal services at Bannister requires judgement. Using financial
measures is not enough in this context. For instance variance analysis would
be less useful here. Financial measures may be complemented with
qualitative, non-financial indicators.

(8+8+8+8+9= 41 marks)

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