QUESTION 1
Pelican Instruments Incorporation focuses on its two main lines of business which are new electrical and mechanical manufacturing technology known as Electric Meters (EM) and the other is Electronic Instruments which is a microchip technology. The products of both of these businesses are substitutes to each other in terms of their successes and processes, therefore, the relative performance of both the businesses is analyzed. The CEO of the company, Steve Park, is satisfied by the financial performance of the company and now he wants to know the relative contribution of marketing, manufacturing and the research and development departments in order find out the contribution of each department in the $622,000 savings of the company’s profit after tax.
The analysis report is shown in the appendix which should be submitted by Amy Schultz, the owner of the company. The calculations in the spreadsheet show that the revenue of the company was surpassed, however, the variable costs of sales had increased by a greater percentage than budgeted. This resulted in lower contribution margin and gross margins for both the businesses. Although there were also savings in the research and development and the marketing department of the company, however, the administrative costs had increased significantly more than they were budgeted. The performances of general manager, marketing manager and the manufacturing manager have also been evaluated to determine their compensations and the shares in the yearly bonus.
QUESTION 2
The performances of all the managers in each of the business segments have been analyzed through variance analysis presented in the appendix.
MANAGERS OF EM
The business segment, EM is dealing with a mature product; therefore, its general manager could argue that EM should follow a low cost strategy. This is the reason that he had decreased his selling price from $40 to $30 per unit. He was able to strengthen his position by this low cost to penetrate the market and benefit from the changes in the market share. The profits were also increased by $679,000. This shows that the general manager’s decision for lowering the price was beneficial for the company.
The marketing manager could argue that with his consistent efforts he increased the market share by 6% and contributed in additional $2.6 million profit. The industry’s demand had impacted negatively; however, there was still an increase in sales which was beneficial. Furthermore, he could demand a share in the bonus for achieving savings in the marketing fixed costs for the company of around $416,000.
The manufacturing manager will have to place a strong argument for the increase in cost. He could argue that the increase in cost is due to more focus being placed on the quality which is evident by the increase in the sales volume. Also, he could argue that he is a partial contributor in the savings of $342,000 in fixed manufacturing costs.
MANAGERS OF EI
The general manager of EI should argue that he had increased the prices for his products to generate additional profits. He also lost $689,000 due to lower sales volume, however, he generated $6.9MM from market changes and $4.9MM from industry demand changes. He should argue and also propose that the EI division should follow a differentiation strategy.
Although, the market share had decreased to 9%, however, he could argue that the market has grown and it were his efforts due to which he was able to maintain such a large piece of the market share. Since the industry’s demand is increasing, therefore, the standard prices have increased. He could also argue that he had contributed partially in fixed marketing expense savings.
The manufacturing manager could argue that he was a partial contributor in the fixed manufacturing cost savings. Since he is pursuing a differentiation strategy, therefore, he has a strong argument that the increase in the variable cost per unit is due to the unique and value added features to differentiate the products of the division in this growing market.
QUESTION 3
The EM business is a harvest business and the product has reached the maturity stage. Therefore, Mr. Park should consider discontinuing the product from the business portfolio as its performance is worse than what was budgeted. However, if he still decides to sell the product, then a low cost strategy is preferred. The compensation for the EM business managers should be based on their basic salary rather than on performance targets, as they should strictly remain within the budget. Mr. Park should consider to grant a share of the bonus to the general and marketing manager. Manufacturing manager should not be considered as the variable costs increased despite low cost strategy.
Regarding the EI division, the market is growing and the product differentiation strategy is risky, therefore, the managers should be more flexible. All the managers should be evaluated based upon market development, product development and R&D spending.......................
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