Case 4-1 Vershire Company (Solution) : Q 1. O V C '
Case 4-1 Vershire Company (Solution) : Q 1. O V C '
Case 4-1 Vershire Company (Solution) : Q 1. O V C '
Profit plays an important measure for assessing plant managers performance and
their determining bonuses.
Not Fully, because profit is made up of two component revenue and expenditure. Plant manager
should responsible for the area which can control by them i.e. expenditure. Expenditure includes
direct materials, direct labour, variable manufacturing, and fixed overhead budget.
Revenue is the concern of sales department whether they meet their obligation of customers
demand fulfilment or not. The sales department has sole responsibility for the price, sales mix,
and delivery schedules. Any difference of opinions between sales and production is always
favoured with the sales department as Vershire wants to satisfy the customer since they can
easily switch to a competitor.
The focus of Exhibit 2 is Net Profit. which is influenced by sales and expenditure. The exhibit
includes variances regarding sales price, sales mix, and sales volume. These are items that the
sales department has responsibility for, rather than plant manager. Therefore, they are
evaluating plant managers based on parameter over which the plant managers have no direct
control. Vershire fails to properly evaluate not only efficiency but also effectiveness.
The cost variances present in Exhibit 2 would be a more accurate performance measure, they are
viewed in terms of sales rather than production. As plant managers cannot control sales, these
variances then become irrelevant.
Overall, the performance evaluators contained within exhibit 2 do not accurately measure the
effectiveness of efficiency of the aluminium can manufacturing plants.
The exhibit 3 give more detailed analysis of the variances of exhibit 2. The division level reports
focus on net sales, including price and mix changes, as well as gross margin. Net sales are
controlled by sales and costs. Plant managers only can control costs, and as such these reports
also lack relevance in terms of evaluating their performance.
The manufacturing division level report also is an adequate performance evaluation report, as it
compares plants that produce different products and that have varying setup times. This makes
any analysis unreliable.
Yes, the management control structure at Vershire Company must be redesign due to lots of
weakness in management control system, which are: -
The style of their budget preparation. Their sales budget preparation had little flexibility
when it was already approved before the start of the year and were already fixed
objectives. This kind of system has an advantage of pushing its managers to strive and
meet the objective budgets.
The companys treatment of its Plant or Manufacturing Department, as being a Profit
Centre. This department only accomplishes orders that the Sales Department dictate,
manufacturing the quality products at the lowest reasonable cost possible considering
the nature of the competitive industry.
Performance Evaluation measurement of the plant managers. Since the Plant Department
is treated as a profit centre, the plant managers promotion and compensation are based
on their profit performance. There can be a misalignment in the objectives in this setup
because while the plant managers strive to put down the cost to achieve higher profits
given the price set, they may sacrifice quality by choosing the lowest cost of materials or
labour for production. The cost can be varied based on the price.
Based on above weaknesses and their justification now we should look on the few aspects on
which improvement can be done, few recommendations are: -