The Abrams Company Case

Nama        :  Lita Khaerunisa Nugraheni

NIM        : 1121002016

Case 5-4

Questions:

1. Evaluate each of the concerns expressed by top management, and if necessary, make recommendations appropriate to the circumstances described in the case.
2. What is your overall evaluation of Abrams’ management control system? Describe any strengths or weaknesses that you identified but did not include in answering the previous question. What changes, if any, would you recommend to top management?

Answers:

1. The Abrams case is using profitability measures to evaluate profit centers. This case covers the three main problems in controlling profit centers:

• The ROI behavior
• Transfer pricing disputes
• Operational trouble shouting

Abrams use book value for fixed assets which inflate the ROI measure as the assets age. ROI based bonus may rob the future, who want to invest in assets if that reduce the bonus. The problem with the inventory level can not be controlled with ROI management. If the company change to RI/EVA it will be possible to negotiate relevant inventory levels in the budget process. High inventory levels can also be managed with differentiated capital charges that will create high interest costs. The best way to control operational tasks is to use non financial measures such as inventory turnover.

1. The ROI target is set based on budget profit divided by actual beginning of the year net assets. The advantage of the Abrams Company ROI system is it does not consider the investment added during the year, because the investments provide little effort to the year, but more benefit to the future. However, the ROI measurement system has some weakness such as defer asset replacement, short-term focus at the expense of long-term. The incentive compensation plan of Abrams Company is bonus plan, and it calculate accurately based on an equation, and it seems equal for all members. In addition, some adjustments also are made associate with the performance of the managers. The performance is measured by compare of actual profit and budget profit. The dollar amount of corporate bonus pool was established by a fixed formula linked to company earning per share. This incentive compensation plan can be considered as a reward system. Using this method the company can increase or maintain motivation.

Strengths:

• The company has a clear management structure.
• The company has a bonus plan for employees.
• The AM Marketing division will input products form the other four divisions, and sell it to US and foreign market, it helps the company save cost when it input internal.

Weaknesses:

The Abrams Company totally has three independent divisions that lack of connection. They purchase their materials separately and they carried excessive inventories most of the year. Also, inside sales sometimes need a negotiation on price, the may lead to low productivity.

Recommendation:

The non-financial performance measurement system should be established. The balanced scorecard is a good choice for company measure performance. The incentive compensation plan will be improved with a good performance measurement system