Problem:
Potter-Bowen (PB) manufactures and sells postage meters throughout the world. Postage meters print the necessary postage on envelopes, eliminating the need to affix stamps. The meter keeps track of the postage, the user takes the meterâ??s counter to a post office and pays money, and the post office initializes the meter to print postage totaling that amount. The firm offers about 30 different postage systems, ranging from small manual systems (costing a few hundred dollars) to large automated ones (costing up to $75,000).
PB is organized into Research and Development, Manufacturing, and Marketing. Marketing is further subdivided into four sectors: North America, South America, Europe, and Asia. The North American marketing sector has a sales force organized into 32 regions with approximately 70-200 salespeople per region.
The budgeting process begins with the chief financial officer (CFO) and the vice president of marketing jointly projecting the total sales for the next year. Their staff looks at trends of various PB models and project total unit sales by model within each marketing sector. Price increases are forecast and dollar sales per model are calculated. The North American sector is then given a target number of unites and a target revenue by model for the year. The manager of the North American sector, Helen Neumann, and her staff then allocate the divisionâ??s target units and target revenue by region.
The target unit sales for each model per region are derived by taking the regionâ??s historical percentage sales for that machine times North Americaâ??s target for that model. For example, model 6103 has North American target unit sales of 18,500 for next year. The Utah region last year sold 4.1% of all model 6103s sold in North America. Therefore, Utahâ??s target of 6103s for next year is 758 units (4.1% x 18,500). The average sales price of the 6103 is set at $11,000. Thus, Utahâ??s revenue budget for 6103s is $8,338,000. Given the total forecasted unit sales, average selling prices, and historical sales of each model in all regions, each region is assigned a unit target and revenue budget by model. The regionâ??s total revenue budget is the sum of the individual modelâ??s revenue targets.
Each salesperson in the region is given a unit and revenue target by model using a similar procedure. If Gary Lindenmeyer (a salesperson in Utah) sold 6% of Utahâ??s 6103s last year, his unit sales target of 6103s next year is 45 units (6% x 758). His total revenue target for 6103s is $495,000 (or 45 x &11,000). Totaling all the models gives each salespersonâ??s total revenue budget. Salespeople are paid a fixed salary plus a bonus. The bonus is calculated based on the following table:
% of total Revenue Target Achieved Bonus
<90% NO BONUS
90-100% 5% of salary
101-110 10% of salary
111-120 20% of salary
121-130 30% of salary
131-140 40% of salary
141-150 50% of salary
>150% 60% of salary
Critically evaluate PB's sales budgeting system and sales force compensation system. Describe any potential dysfunctional behaviors that PB's systems are likely to generate ?