Recommendation For Premium Equipment Ltd

High quality, on-time delivery and pricing control as success elements

Memo

To: Richard Stewart

From: Your name

Date:

Subject: Recommendation regarding the responsibility center 

The following are three essential success elements for Premium Equipment Ltd.:

• According to the president, the product quality is very high.
• On-time product delivery to the consumer and
• It has price control over its products.

High quality: The extremely high quality of the product provides the customer needs and satisfaction. The high-quality product makes customer loyalty which helps to generate revenue. Customer loyalty also helps to recommend products to others. In this case, Premium Equipment Ltd manufactures high-quality heavy construction equipment which helps them to generate more profit.

The on-time delivery of the product to the consumer indicates the performance of the company. On-time delivery provides a better relationship between the customer and the company. Therefore, on-time delivery provides an impact on the company’s profitability. Premium Equipment Ltd delivers heavy construction equipment to customers on time which creates a good reputation in the market.

One of the important success factors is pricing control over the product since a corporation should match the market price of its product. It helps the company to manage to provide affordable goods to the consumer. Therefore, the demand for the product increases which directly impacts the revenue and the profitability of the company.

A cost center is a type of department under the organization that deals in costs to manufacture the product and others. It does not deal with or add to the profit. The cost center records the expenses incurred during the operation of the company. It supports the organization that how to use the resources in operation by the company. A profit center is a type of department in revenue for the company. Under the profit center, the manager has the responsibility to make decisions regarding the pricing of products, production policies, and marketing programs (Your Article Library, 2022).

Therefore, we recommend that the manufacturing plant should be organized in terms of a cost center. Under the cost center, the company is required to create a Maintenance department, accounting department, production department, and human resource department. The main focus of the cost center in the manufacturing plant is quality control.

The cost center designation is the best since it indirectly adds to a company’s profit by improving productivity, best customer support, or enhancing the price of the product. It enables management to allocate resources more effectively by gaining a better knowledge of how they are actually used. It contributes to the company’s indirect profit generation. 

The sales districts should be organized in terms of a profit center because sales of goods are part of a profit center. Create a specific department that records cost and revenue.

Profit center designation is ideal in sales since it aids in the development of plans for underperforming units by allocating resources and raising or growing revenues. When a company’s management concentrates on a department’s earnings potential, the department’s total productivity rises. 

The rush order decides whether the factory is viewed as a cost center or a profit center of the sales division, and hence whether it is accepted or rejected. If the plants are cost centers, the rush order would be refused because it will increase in increasing costs.

Differentiation between cost center and profit center

If the factories are profit centers or sales divisions, the plant managers should appreciate the offer since there would be more income and less expense, resulting in a higher profit. As a result, we should recommend a profit center. In this scenario, there is a requirement for a cost center for inventory management and a price controller.

A profit center is best for the manufacturing plant at the time of rush order because, during the rush order, the cost of the product is high which helps to generate more profit.

The cost center is best for the manufacturing plant but in the case of sales and manufacturing plant at rush order, the profit center is best because at this time organization is required to generate maximum profit,

Thank you,

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A.

Calculation of ROI

B.

Calculation of Residual income

C.

i.

A higher return on investment is good for the investment. In this case ROI of the Taranaki division and the Manawatu division based on investment (800000), is higher than the estimated ROI. Therefore, the proposal of both divisions is rejectable. But the ROI of the Waikato Division is lower than the estimated yield. Therefore, accept the investment proposal. 

ii.

Higher residual income is acceptable for investment purposes. In this case, the residual income of the Taranaki division, Manawatu division, and Waikato division is high. Therefore, all divisions are acceptable. 

D.

This situation raises the following concerns about the use of return on investment (ROI) and residual income (RI):

• In the case of new investment, the proposal is accepted as per the higher RI. On the new investment ROI yields always provide a lower return. As per analysis, the RI of TaranakiDivision, Manawatu Division, and Waikato Division is high as compared to the minimum return.
• Proposal Decision:Both overemphasize short-term success at the cost of long-term efficiency if employed in a short-term manner. In the early years, investment projects with a positive net present value might display low ROI and residual income numbers, resulting in proposal disapproval by management.

In this case, the ROI of the Waikato Division is lower than all. Therefore, on the basis of ROI, the investment proposal is accepted. As per the Residual income, The RI of all divisions is high, therefore we accept the proposal.

• When assets are assessed at their net book value, the ROI and residual income statistics grow as the age of the assets. Managers may be enticed to keep obsolete plants and machinery.
• Both methods try to summarize divisional achievement in a single graph. Multi-faceted performance measurements are required due to the complicated structure of modern enterprises.
• Both measurements need a calculation of the cost of capital, which might be hard to determine. (Accaglobal.com, 2022)

E.

The financing cost is not included in the calculation of the total rate of return. It’s computed by dividing net operating income by the acquisition price of the property (WallStreetMojo, 2022). Divisional performance is assessed by the rate of return on investment, and it also stimulates others to invest in the investment proposal. Yes, it is worthwhile for the corporation to invest in projects that provide an 11 percent return in this scenario. 

A.

The Audio division, it is assumed, has sufficient ideal capacity. When the audio division moves the speakers to the TV division, the contribution sum is not forfeited. As a result, the opportunity cost in this scenario is zero. As a consequence, mainly the audio division’s variable cost is important, and the variable cost is $65 per unit. This cost would be the minimum cost at which the audio division is available. Because the fixed cost has already been made, it will be irrelevant.

Currently, the TV division is available for $76 per unit from the source. As a result, the maximum price per unit for the TV division will be $76. As a result, the acceptable price range would be between $65 and $76 per unit. 

B.

If the Audio section sells all of the speakers it produces outside of the client, it will not be required the contribution amount. As a result, the opportunity cost in this scenario is $30 per unit (Selling price to outside customer less variable cost per unit). Therefore, for the audio division, the relevant cost is $95 per unit which is calculated by adding variable cost + opportunity cost. This will be the cheapest option.

In addition, the TV division can acquire units from the supplier for $76 each. As a result, the highest price per unit for the TV division will be $76. The highest permissible price for the TV division is $76 and the lowest permissible price for the audio division is $95. As a result, there is no acceptable band within which a transfer is conceivable.

C.

Assume that the Audio section sells all of the speakers it can to outside consumers and that a $22 variable cost is avoided. The contribution money will be forfeited when such an audio division moves the speakers to the TV division.   So, for the audio division, the relevant cost is $66 per unit, which is the new variable cost (variable cost less avoided variable cost) plus opportunity cost. This is the cheapest option. $30 per unit is the opportunity cost.

In addition, the TV division can buy from the supplier for $76 each. As a result, the most expensive item will cost $76. As a result, a price range of $66 to $76 per unit will be considered appropriate.

D

Some non-economic elements, such as the quality of one’s product, market rivalry, and so on, are not evaluated by the organization as a result of decentralization, which has long-term consequences.

When decentralized managers bargain for a transfer price, they consider the success of their division instead of the entire company. So, if it is negative from the division’s perspective but beneficial from the organization’s perspective, then decentralization choices will be made in the division’s favor.

In certain circumstances, internal negotiations hurt personnel relationships. 

A.

(Balanced Scorecard Institute, 2022)

B.

Some of the fixable reasons as to why implementation of the balanced scorecard may fail alongside the possible recommendations which can help prevent the failure of one have been elucidated as follows:

1. Poorly Defined Metrics: The metrics that are selected for the scorecard are most often poorly defined that can cause the approach to remain ineffective. For instance, if poor metrics are being used to gauge a specific set of objectives, the scorecard may prove to be ineffective. Hence, metrics that go into the scorecard must be clear and relevant. Furthermore, these should be collected at an ideal frequency for decision-making and should be defined in such a manner that allows for consistent measurement.
2. Inefficient Data Collection: Management gravitates toward an overemphasis upon financial metrics as opposed to other metrics because of easy data availability which results in the scorecard not gauging non-financial performance appropriately. Additionally, an organization may have to put in a lot of time and effort for appropriate data collection which in layman’s terms can prove to be a costly affair. It, therefore, requires the commitment of the management to prioritize a few key performance indicators and automate the data collection process for attaining positive results out of the scorecard.
3. Too much internal focus: One of the main criticisms of the scorecard is that it places a great focus on the internal business environment. To overcome these issues, the management has to make initiatives to constantly monitor the external business environment as well and create a balanced set of metrics after considering the internal and the external business environment.
4. Resistance to Change: Departmental managers may not be ready to embrace the change and may not make many initiatives in implementing the scorecard. It is therefore important to create awareness programs concerning the benefits of the scorecard as to how it can help attain the mission and vision of the organization. This is only possible through appropriate training initiatives.
5. Limited Perspectives: The traditional balanced scorecard tool prepared by Kaplan and Norton just comprises four perspectives that may not suffice the purpose depending upon the organization. One must make note that the scorecard is flexible and since then there are several modern scorecards (different adaptations of the BSC) available which include up to 6 perspectives that have seen an addition of an environmental perspective or the corporate social responsibility perspective.
6. Absence of a Formal Review Process: Scorecards are most effective when they are evaluated on a regular basis. Whereas if the value of a measure varies on a regular basis as well as the factors under management’s control may be modified on a regular basis, the metric should be examined regularly.
7. Insufficient project focus: A balanced scorecard endeavor must be treated as any other important undertaking. To create a strategy, allocate tasks, monitor progress, and inspire the team, you’ll need to have a project manager. This seems to be particularly true in larger enterprises, but even small businesses may profit from a well-thought-out strategy.
8. Scorecards and Other Resources Not properly customized: No balanced scorecard instrument may be utilized immediately away after being unpacked. It must be tailored to your company’s purpose and goal, as well as your personnel. Although the four views outlined before aren’t etched in stone and maybe tweaked to fit your needs.
9. The scorecard is not used across the company: The balanced scorecard must not be utilized only as an executive platform or to track production goals. For it to really represent success and problem areas, it must relate to every individual in the business.
10. Poorly selected teams: In the term balanced scorecard, keep the word balance in mind. The scorecard procedure will need involvement from several departments at various levels. In an enterprise with 3000 employees and 15 divisions, a group of two managers isn’t really much of a team.
11. Insufficient management support to move the project forward: The balanced scorecard is a time-consuming procedure that touches on every area of a company. It’s also a time-consuming procedure that will drain financial resources. As a result, the executive team must be on board, as well as the project must have the backing of the whole executive team to be effective.

(Bpminstitute.org, 2022)

In the process of implementing any new system, the CEO has to be mindful of the following issues that have been outlined as follows:

1. Value Addition: Implementing any new system can always help to add a layer of automation but one needs to gauge the benefits of adopting a new system. It can be thought of as a cost-benefit analysis where the business will lose out on value if the costs do not justify the perceived value.
2. Improper Planning: Any change in process in an organization requires step-by-step planning without which the change is likely to fall apart and cause more issues than benefits.
3. Lack of Consensus: The organization may not be willing to embrace the change with some even becoming hostile to change. Hence, it is important to communicate and obtain a consensus among all the key people before implementing such a new system.
4. Staff Training: Any new system implementation will require the business to provide adequate training such that the organization is in a position to reap the complete benefits of the new system. Implementing staff training costs in the budget is often omitted and ignored which should not be ignored as inadequate training may prove to be a costly affair in the long run. (Santexgroup.com, 2022) 

References

Accaglobal.com. (2022). Decentralisation and the need for performance measurement | ACCA Qualification | Students | ACCA Global. Accaglobal.com. Retrieved 18 April 2022, from https://www.accaglobal.com/gb/en/student/exam-support-resources/fundamentals-exams-study-resources/f5/technical-articles/performance-measurement.html.

Balanced Scorecard Institute. (2022). Balanced Scorecard Basics. Balanced Scorecard Institute. Retrieved 18 April 2022, from https://balancedscorecard.org/bsc-basics-overview/.

Bpminstitute.org. (2022). Problems Implementing a Balanced Scorecard | BPMInstitute.org. Bpminstitute.org. Retrieved 18 April 2022, from https://www.bpminstitute.org/resources/articles/problems-implementing-balanced-scorecard.

Santexgroup.com. (2022). 7 Steps for Software Implementation Success | Santex. Santexgroup.com. Retrieved 18 April 2022, from https://santexgroup.com/blog/7-steps-for-software-implementation-success/.

WallStreetMojo. (2022). Financing Costs. WallStreetMojo. Retrieved 18 April 2022, from https://www.wallstreetmojo.com/financing-costs/.

Your Article Library. (2022). 4 Types of Responsibility Centres. Your Article Library. Retrieved 18 April 2022, from https://www.yourarticlelibrary.com/accounting/responsibility-accounting/4-types-of-responsibility-centres/52904.

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