Problem 1: Computing residual income A business whose investors require a return on investment of 8% reports an income of $1 million on an investment of $20 million. What is residual income for this business?
Problem 2: Choosing responsibility center type For each of the following units identify whether the most appropriate responsibility center form is a cost center, a profit center, or an investment center and why you have made that choice.
a. A laboratory in a hospital
b. a restaurant in a department store
c.The computer services group in an insurance company
d. A maintenance department in a factory
e. A customer service department in a mail-order company
f. A warehouse used to store goods for distribution in a large city
g. A publishing company acquired by a diversified corporation
Problem 3: Strategy and control Many people believe that the focus of control in a successful organization reflects the strategic initiatives in the organization. For each of the following organizations, identify what you think are the three most important items assessed by the organization's financial control system and why each is important. For each organization, what critical information is not assessed by the financial control system?
a. A company selling cable television services to its subscribers
b. A symphony orchestra
c. An organization selling canned soup
d. A government agency responsible for finding jobs for its clients
e. An auditing firm
f. A company selling high-fashion clothing
Problem 4: Assigning responsibility for uncontrollable events Some people and organizations believe that the discussion of controllable and uncontrollable events is distracting in the sense that is encourages finger pointing and an excessive preoccupation with assigning blame. These observers argue that it is more important to find solutions than to identify responsibility for unacceptable or acceptable events.
a. What do you think of this argument?
b. As an organization moves away from assessing and rewarding controllable performance what changes would you expect to see in its organization structure?
Problem 5: Choosing an organization structure You are a senior manager responsible for overall company operations in a large courier company. Your company has 106 regional offices (terminals) scattered around the country and a main office (hub) located in the geographical center of the country. Your operations are strictly domestic. You do not accept international shipments.
The day at each terminal begins with the arrival of packages from the hub. The packages are loaded onto the trucks for delivery to customers during the morning hours. In the afternoon, the same trucks pick up packages that are returned to the terminal in late afternoon and then shipped to the hub, where shipments arrive from the terminals into the late evening and are sorted for delivery early the next day for the terminals.
Each terminal in your company is treated as an investment center and prepares individual income statements each month. Each terminal receives 30% of the revenue from packages that it picks up and 30% of the revenue from the packages it delivers. The remaining 40% of the revenue from each transaction goes to the hub. The revenue per package is based on size and service type and not the distance that the package travels. (There are two services, overnight and ground delivery, which take between 1 and 7 days, depending on the distance traveled.)
All customers service is done through a central service group located in the hub. Customers access this service center through a toll-free telephone number. The most common calls to customer service include requests for package pickup, requests to trace an overdue package, and requests for billing information. The company has invested in complex and expensive package tracking equipment that monitors the package's trip through the system by scanning the bar code placed on every package. The bar code is scanned when the package is picked up, enters the originating terminal, leaves the originating terminal, arrives at the hub, leaves the hub, arrives at the destination terminal, leaves the destination terminal and is delivered to the customer. All scanning is done by handheld wands that transmit the information to the regional and then central computer.
The major staff functions in each terminal are administrative(accounting, clerical, and executive), marketing (the sales staff), courier (the people who pick up and deliver the shipments and the equipment they use), and operations (the people and equipment who sort packages inside the terminal)
This organization takes customer service very seriously. The revenue for any package that fails to meet the organization's service commitment to the customer is not assigned to the originating and destination terminals.
All company employee receive a wage and a bonus based on the terminal's residual income. The system has promoted many debates about the sharing rules for revenues, the inherent inequity of the existing system, and the appropriateness of the revenue share for the hub. Service problems have arisen primarily relating to overdue packages. The terminals believe that most of the service problems relate to mis-sorting in the hub, resulting in packages being sent to the wrong terminals.
a. Explain why you believe ab investment center is or is not an appropriate organization design in this company.
b. Assuming that this organization is committed to the current design, how would you improve it?
c. Assuming that this organization has decided that the investment center approach is unacceptable, what approach to performance evaluation would you recommend?