3 Bridgewater Co provides training courses for many of the mainstream software packages on the market.
The business has many divisions within Waterland, the one country in which it operates. The senior managers of
Bridgewater Co have very clear objectives for the divisions and these are communicated to divisional managers on
appointment and subsequently in quarterly and annual reviews. These are:
1. Each quarter, sales should grow and annual sales should exceed budget
2. Trainer (lecture staff) costs should not exceed $180 per teaching day
3. Room hire costs should not exceed $90 per teaching day
4. Each division should meet its budget for profit per quarter and annually
It is known that managers will be promoted based on their ability to meet these targets. A member of the senior
management is to retire after quarter 2 of the current financial year, which has just begun. The divisional managers
anticipate that one of them may be promoted at the beginning of quarter 3 if their performance is good enough.
The manager of the Northwest division is concerned that his chances of promotion could be damaged by the expected
performance of his division. He is a firm believer in quality and he thinks that if a business gets this right, growth and
success will eventually follow.
The current quarterly forecasts, along with the original budgeted profit for the Northwest division, are as follows:
Q1 Q2 Q3 Q4 Total
$’000 $’000 $’000 $’000 $’000
Sales 40·0 36·0 50·0 60·0 186·0
less:
Trainers 8·0 7·2 10·0 12·0 37·2
Room hire 4·0 3·6 5·0 6·0 18·6
Staff training 1·0 1·0 1·0 1·0 4·0
Other costs 3·0 1·7 6·0 7·0 17·7
––––– ––––– ––––– ––––– ––––––
Forecast net profit 24·0 22·5 28·0 34·0 108·5
––––– ––––– ––––– ––––– ––––––
Original budgeted profit 25·0 26·0 27·0 28·0 106·0
Annual sales budget 180·0
––––– ––––– ––––– ––––– ––––––
Teaching days 40 36 50 60
Required:
(a) Assess the financial performance of the Northwest division against its targets and reach a conclusion as to
the promotion prospects of the divisional manager (8 marks)
The manager of the Northwest division has been considering a few steps to improve the performance of his division.
Voucher scheme
As a sales promotion, vouchers will be sold for $125 each, a substantial discount on normal prices. These vouchers
will entitle the holder to attend four training sessions on software of their choice. They can attend when they want to
but are advised that one training session per quarter is sensible. The manager is confident that if the promotion took
place immediately, he could sell 80 vouchers and that customers would follow the advice given to attend one session
per quarter. All voucher holders would attend planned existing courses and all will be new customers.
Software upgrade
A new important software programme has recently been launched for which there could be a market for training
courses. Demonstration programs can be bought for $1,800 in quarter 1. Staff training would be needed, costing
$500 in each of quarters 1 and 2 but in quarters 3 and 4 extra courses could be offered selling this training. Assuming
similar class sizes and the usual sales prices, extra sales revenue amounting to 20% of normal sales are expected
(measured before the voucher promotion above). The manager is keen to run these courses at the same tutorial and
room standards as he normally provides. Software expenditure is written off in the income statement as incurred.
Delaying payments to trainers
The manager is considering delaying payment to the trainers. He thinks that, since his commitment to quality could
cause him to miss out on a well deserved promotion, the trainers owe him a favour. He intends to delay payment on
50% of all invoices received from the trainers in the first two quarters, paying them one month later than is usual.
Required:
(b) Revise the forecasts to take account of all three of the proposed changes. (7 marks)
(c) Comment on each of the proposed steps and reach a conclusion as to whether, if all the proposals were taken
together, the manager will improve his chances of promotion. (6 marks)
(d) Suggest two improvements to the performance measurement system used by Bridgewater Co that would
encourage a longer term view being taken by its managers. (4 marks)
(25 marks) 3 Bridgewater Co
(a) The divisions of Bridgewater Co have been given very specific targets to meet it is reasonable to assume that performance
will be assessed relative to them.
Sales Growth
The northwest division suffers from a slow start to the year, with falls in sales from quarter 1 to quarter 2. Overall sales growth
looks better with an average growth of 14% achieved. We don’t have quarterly budget sales to compare to but the low growth
in budget profit suggests that much slower sales growth than that actually achieved was expected. Overall the sales budget
has been exceeded, with big increases in sales in the last two quarters
The manager’s promotion could be damaged by the slow start. The ‘good news’ of better sales growth comes after the
promotion decision is taken.
Cost control – trainer costs
The division spends slightly more (as a % of sales) than budgeted on trainers. It is spending 20% as opposed to 18% on
trainers. Given the manager’s attitude towards quality it appears he is trying to employ better trainers in the hope of more
satisfied customers. This should, logically, build customer loyalty and improve local and brand reputation. This could possibly
explain the better growth in the later quarters.
Again the problem for the promotion seeking manager, investing in the future in this way damages short term performance
measures, in this case cost targets.
Cost control – room hire costs
The divisional manager is also spending more on room hire. He is spending 10% as opposed to the budgeted 9% of sales.
He could be buying poorly, hence wasting money. Alternatively he could be hiring better quality rooms to improve the learning
environment and enhance the training experience.
Again his focus on quality may be undermining his short term promotional prospects.
Profit
Annually, the divisional manager is beating the targets laid down for profit. His problem as far as his promotion is concerned
is the profit targets laid down for the first two quarters are not met.
The promotion decision comes too early for his employers to see the benefit of a quality focus made earlier in the year.
Overall, promotional prospects do not look good. The manager has not met any of his targets in the first two quarters. His
only hope is that his bosses look at future forecasts and take them in to consideration when making the decision.
(b) Revised forecasts
Q1 Q2 Q3 Q4 Total
$’000 $’000 $’000 $’000 $’000
Sales 42·5 38·5 62·5 74·5 218·0
less:
Trainers 8·0 7·2 12·0 14·4 41·6
Room hire 4·0 3·6 6·0 7·2 20·8
Staff training 1·5 1·5 1·0 1·0 5·0
Other costs 3·0 1·7 6·0 7·0 17·7
Software 1·8 1·8
––––– ––––– ––––– ––––– –––––
Forecast Net profit 24·2 24·5 37·5 44·9 131·1
––––– ––––– ––––– ––––– –––––
Original Budget profit 25·0 26·0 27·0 28·0 106·0
18
Incremental effects (as a working)
Q1 Q2 Q3 Q4 Total
$’000 $’000 $’000 $’000 $’000
Extra sales
Voucher sales 2·5 2·5 2·5 2·5 10·0
Software sales 10·0 12·0 22·0
Extra costs
Trainers 2·0 2·4 4·4
Room hire 1·0 1·2 2·2
Staff training 0·5 0·5 1·0
Software 1·8 1·8
Change in forecast Net profit +0·2 +2·0 +9·5 +10·9 +22·6
(c) Voucher scheme
At first glance of it the voucher scheme looks a good one. The manager is confident of a reasonable volume of sales and given
that all the attendees will go on existing courses there will be no additional costs. The scheme seems to generate $10,000
of extra sales revenue in the year. One should question the assumption that no extra costs are incurred.
One potential concern would be that existing customers may object to the price reduction, particularly if they have already
paid a higher price for a future course. However, most customers will probably not be aware of the price difference or will not
bother complaining, those that do complain can be dealt with individually. It is common with promotions that the offer clearly
states the terms and conditions that apply. In this way the manager can protect existing sales by excluding existing sales from
the new offer.
From a promotion point of view the extra revenue and profit helps a little. If the revenue is spread evenly (as suggested) there
will be $2,500 of extra revenue and profit in each of quarter 1 and 2. Unfortunately, in both cases the manager will still fall
short of the target profit and the growth between quarter 1 and 2 will still be negative. He would need the take up rate of the
sessions to be quicker to help his promotion prospects. Manipulation of the accounting figures should be resisted
Software upgrade
A software training company must stay in touch with modern software developments. From that point of view you could argue
that this development is essential. Financially the proposal looks sound. The extra courses will generate a profit of $12,600
in this year alone, with, presumably, more courses to follow. A slower than expected take-up rate for the new course would
reduce this year’s effect.
The promotional aspects are not as good. The extra costs occur in quarter 1 and 2 but the revenue does not come in until
after the promotion decision is made. Integrity is an issue here. Personal promotional prospects must come second to sound
business decisions. The manager should show the revised forecasts to his bosses and hope this sways the decision.
Delayed payment to trainers
This is a poor idea. This will not affect profit, costs or any of the performance measures in question. It will affect cash flow
in a positive manner. However, to delay payment without agreement can damage the relationships with the trainers, upon
which he depends on for the quality of their presentations.
Overall the three proposals do improve the performance of the division. However most of the benefits accrue after quarter 2
and might therefore come too late for the promotion decision.
(d) To encourage a longer term view more emphasis should be placed on non-financial measures of performance.
This business is dependent amongst other things on the quality of its course provision. As a result an improvement could be
to set targets for the quality of presentations given. Attendees could be asked to grade all trainers (or facilities) at the end of
sessions. This would prevent cheap but weak presenters (and poor quality rooms) being employed by managers.
Equally, the senior managers have to take account of longer periods when assessing performance. Viewing a single quarter
is too narrow and looking at the whole year is advisable. Wider issues should also be taken into consideration when making
promotional decisions. Repurchase rates could be measured for client companies for example. | 
发表于 2008-10-11 14:03
|