VARIANCES, EVALUATION, AND BEHAVIOR
Jackie Iverson was furious. She was about ready to fire Tom Rich, her purchasing agent. Just a month ago, she had given him a salary increase and a bonus for his performance. She had been especially pleased with his ability to meet or beat the price standards. But now, she found out that it was because of a huge purchase of raw materials. It would take months to use that inventory, and there was hardly space to store it. In the meantime, where could the other materials supplies be put that would be ordered and processed on a regular basis? Additionally, it was a lot of capital to tie up in inventory-money that could have been used to help finance the cash needs of the new product just coming on line.
Her interview with Tom was frustrating. He was defensive, arguing that he thought she wanted those standards met and that the means were not that important. He also pointed out that quantity purchases were the only way to meet the price standards. Oth- erwise, an unfavorable variance would have been realized.
Required:
1. Why did Tom Rich purchase the large quantity of raw materials? Do you think that this behavior was the objective of the price standard? If not, what is the objective(s)?
2. Suppose that Tom is right and that the only way to meet the price standards is through the use of quantity discounts. Also, assume that using quantity discounts is not a desirable practice for this company. What would you do to solve this dilemma?
3. Should Tom be fired? Explain.