Case Study - Management Control System
Tru-Fit Part, Inc
1. What would you recommend to top management regarding the three problems they have identified?
a. Transfer Price
I recommend that manufacturing divisions and AM Marketing division should have an agreement on the standard of transfer pricing.
To prevent any unnecessary dispute. the availability of the standard transfer pricing method is very important .
The dispute may exist due to incentive bonus plan which relates to sales volume to AM Marketing division (plant’s actual profit as a basis of plant manager’s bonus adjustment, was adjusted by favorable/unfavorable gross margin variance caused by sales volume to AM Marketing division)
b. AM Manufacturing relationship
Manufacturing divisions have the capability and experience to develop their partnership with OEM, with each sales department as a revenue center working to develop products and services with the OEM.
On the other side, the AM marketing division capability is only marketing to AM wholesalers.
The recommendations are:
1. To review existing bonus strategy which related to sales volume to AM marketing division, followed by standard of transfer pricing
2. To create AM sales to increase AM growth by developing product in the market
c. Inventory level
For inventory, I think the inventory of the company can be reduced by :
- Maintaining good communication with OEM about their demand in order for manufacturing to supply parts on time and therefore reducing inventory in the supply chain
- Reviewing company owned warehouse by AM Marketing as a necessary exercise to reduce the inventory
2. Are there any matters not mentioned by top management that you feel are problematical?
One of them is related to standard bonus that the standard bonus plan came up with a simple understandable scheme.
However when it comes to the award, this award could be varied up and downward as much as 25% at the discretion of superior.
There needs to be a standard in varying up/downward
1. What would you recommend to top management regarding the three problems they have identified?
a. Transfer Price
I recommend that manufacturing divisions and AM Marketing division should have an agreement on the standard of transfer pricing.
To prevent any unnecessary dispute. the availability of the standard transfer pricing method is very important .
The dispute may exist due to incentive bonus plan which relates to sales volume to AM Marketing division (plant’s actual profit as a basis of plant manager’s bonus adjustment, was adjusted by favorable/unfavorable gross margin variance caused by sales volume to AM Marketing division)
b. AM Manufacturing relationship
Manufacturing divisions have the capability and experience to develop their partnership with OEM, with each sales department as a revenue center working to develop products and services with the OEM.
On the other side, the AM marketing division capability is only marketing to AM wholesalers.
The recommendations are:
1. To review existing bonus strategy which related to sales volume to AM marketing division, followed by standard of transfer pricing
2. To create AM sales to increase AM growth by developing product in the market
c. Inventory level
For inventory, I think the inventory of the company can be reduced by :
- Maintaining good communication with OEM about their demand in order for manufacturing to supply parts on time and therefore reducing inventory in the supply chain
- Reviewing company owned warehouse by AM Marketing as a necessary exercise to reduce the inventory
2. Are there any matters not mentioned by top management that you feel are problematical?
One of them is related to standard bonus that the standard bonus plan came up with a simple understandable scheme.
However when it comes to the award, this award could be varied up and downward as much as 25% at the discretion of superior.
There needs to be a standard in varying up/downward