Financial and nonfinancial performance measure, goal congruence. (CMA, adapted)

Question

Financial and nonfinancial performance measure, goal congruence. (CMA, adapted) Precision Equipment specializes in the manufacture of medical equipment, a field that has become increasingly competive. Approximately 2 years ago, Pedroz Mendrez,president of Precision, decided to revise the bonus plan(based, at the time, entirely on operating income) to encourage division managers to focus on areas that were important to customers and that added value without increasing cost. In addition to a profitability incentive, The reised plan include incentives for reduced rework costs, reduced sales returns , and ontime deliveries. The company calculates and rewards bonuses semiannulally on the following basis: A base bonus is calculated at 2 percent of operating income; this amount is then adjusted as:

Explanation / Answer

Answer : 1) Mandez needed to introduce these new measures to control and reduce the Sales return , Rework Cost and increase the on time delivery for its products. Such attributes would lead to better quality product line for the company and also prevent financial losses in the form of returned goods and repair costs

2)

Answer 3) The new bonus plan directly linked the bonus with the Quality the managers were providing and thus brought about the change with the managers implementing better control to reduce rework , Sales return and increase delivery on time.

thus it seems that the management has proved succesful in achieving its goal.

Central Division West Division Particulars Jan to June july to Dec Jan to June July to Dec Operating Income 346500 330000 256500 304500 Base Bonus @2% of Operating income 6930 6600 5130 6090 less : Rework Cost excess of 2% above 1695 1650 0 0 Add : $8000 if on time delivery greater than 98% 0 1500 4000 0 by 1500 if between 96 to 98% Add: 2500 if sale return less than equal 1.5% of sale 2500 Less : 50% of sale return in excess of 1.5% 7875 1500 748.75 0 Bonus 0 4950 8381.25 8590

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