Module 4 case study and structured learning project

¶ … version of the table, with no allocated costs.

New York

Chicago

Paris

Little Rock

Billings (Revenue)

Traceable Consulting Costs

Non-Traceable Consulting Costs

Gross Profit on Sales

Traceable Other Costs

Non-Traceable Other Costs

Net Income

This version of the table, with no non-traceable costs allocated, should provide a clearer picture on the managers' work and on the way they have understood the nature of their responsibilities.

The New York Division stands out with a Net Income (non-traceable costs not included) of $7,700, which is clearly better than all other divisions have managed to do. However, one must take into consideration the fact the Total Revenue for the New York division is larger than anybody else's. If we compare (for the sake of thoroughness) the Net Income with the Revenue, we find out that the Net Income is 35% of the Revenue, which means that the efficiency of the Division, non-traceable costs not included, is 35%.

The Chicago division does pretty well, with a Net Income of $3,800, which is better than the Paris and Little Rock divisions, but worse than the New York division. However, considering that the revenues are only $10,000, Chicago is doing well. Net Income / Revenue is 38%, which means Chicago is better off than Paris and New York, but is outrun by Little Rock.

The Paris division is indeed a problem. Its revenues are almost comparable to New York ($16,000 compared to $22,000), but its Net Income is less than half of that of the New York division: $3,000. Even the Chicago division, which has considerably less activity, does better, with a total income of $10,000 and a Net Income of $3,800. Something has got to be done about the Paris division. Net Income / Revenues is 18.75%, which means that a large portion of the proceeds is allocated to costs, which have to be considerably lowered.

Finally, the Little Rock division is outperforming all the other ones. Although its Net Income is only $1,000, it manages to do that with only $2,000 revenues, which is indeed great, considering that its efficiency is 50%, better than New York and Chicago, and far more than Paris.

Comparing the values obtained by dividing the Net Income, without allocating non-traceable costs) with the Revenues per division, one might observe that the New York, Chicago and Little Rock divisions do better than the average 31%, while Paris does not so good, with an 18.75% record.

2) an analysis of the cost-allocation in the initial case (20% of revenues for Non-Traceable Consulting Costs and 5% of revenues for Non-Traceable Other Costs) indicates that New York, Chicago and Little Rock are making money, while Paris is losing money. That is consistent with the analysis above (excluding non-traceable costs).

New York

Chicago

Paris

Little Rock

Billings (Revenue)

Traceable Consulting Costs

Non-Traceable Consulting

Costs

Gross Profit on Sales

Traceable Other Costs

Non-Traceable Other Costs

Net Income

Net Income / Revenue

The profit rate for the entire company is 6.00%, while New York reaches 10.00%, Chicago 13.00%, Little Rock 25.00% and Paris -6.25%. The conclusion of the previous analysis still stands. Something has to be done for the Paris division, while the methods implemented in Little Rock have to be closely observed, in order for them to be applied across the company. It would seem that the idea of going to smaller communities was excellent, as the profit rate exceeds all expectations: more than 4 times the company average and almost double the Chicago one (which was previously the highest).

The conclusion is that the Paris manager has to be sacked, while the one in Little Rock has to be commended for his/her achievements. As for the New York and Chicago divisions, their managers should definitely try to improve the way they allocate their costs and to make some cuts, since the costs are obviously excessive.

3) as far as goal congruence is concerned, managers should not be paid in accordance with the total net profit of the company, but only in accordance with the one obtained by them.

Another change that should be applied is allocating the non-traceable costs according not to the total revenues of a division, but to the traceable costs incurred by that particular division, since managers should try to minimize costs as much as possible. However, that would mean that the managers would disregard revenues in favor of costs. Therefore, a more relevant indicator of a manager's performance is the cost margin (excluding non-traceable costs). That is, calculating the total traceable costs divided by the total revenues of a division. This indicates how efficient a manager actually was, since the higher the cost margin is, the higher the chance of the manager to get sacked.

However, this brings forth another issue. If only traceable costs are considered, it means that some managers will get stuck with non-traceable costs that they have not benefited from. After all, the business environment in Paris or New York is certainly different than the one in Little Rock, Arkansas. Therefore, not only the traceable costs have to be considered, but some kind of difficulty factor should be attributed to each division, according to the toughness of the particular business environment. The products that Creative Consumer Consultants Ltd. offers are harder to find in Little Rock, but are certainly available in Paris. Therefore, the Paris manager might be twice as good as the one in Little Rock but has to face tougher competition. The company should probably leave the big-city market and concentrate on small town initiatives, which seem to be highly beneficial.

As a conclusion, I would say that the company has to concentrate on doing business in smaller communities, should try to reduce costs, if it continues its operations in large cities and should really stop paying managers on the basis of total company profit, since the only result is the negligence of these managers and their hope that their colleagues will perform better, thereby allowing them to get something off their backs.