Chapter five measuring yield, mix and quantity effects learning Objectives

In recent years the blank Division has produced highly satisfactory return-on investment figures and a reasonable profit growth. The board has however, been concerned by the large unfavorable variances which have been consistently reported. The normal retort of the Blank
Division manager to queries on the size of variances has been to state unequivocally that it is the bottom line that matters if that’s OK you can forget the rest. He has also consistently promoted the performance of his division during 2000 and 2001 to the board as ‘excellent’
and rebuffed any judgements to the contrary. Results for the last two years are given in
Exhibits 301.1 and Questions. What criticism would you make of the approach to divisional-performance assessment employed by the board of Zeros plc?
2. Would you agree with Joe Cool’s assessment that his division’s performance was excellent during 2000 and 2001?
3. What suggestions would you make for improving the divisional-performance measurement in Zeros plc?
Case
Instrument& Ltd
Adapted from a case written by Vijay Govindarajan and John Shank (This case requires the analysis of budgeted versus actual performance for different organizational functions and considers strategic versus operational issues.
David Jones, president and principal shareholder of Instrumental Ltd, sat at his desk reflecting on the 2001 results (Exhibit 302.1). For the second year in succession the company had exceeded its profit target. David was obviously happy with the results. All the same, he wanted to get abetter feel for the relative contributions of the
R&D, manufacturing and marketing departments in this overall success. With this in mind, he called his assistant, Jennifer, a recent graduate of the London Business
School, into his office.
‘Jennifer,’ he started, as you can see from our recent financial results, we have exceeded our profit target by £622 000. Could you please prepare an analysis Showing how much RD, manufacturing and marketing contributed to this?’
Jennifer, flushed with all the fervor and enthusiasm of a total convert to professional management, got down to work immediately. She collected all the data in Exhibit
302.2
and then wondered somewhat disconsolately what her next step should be.
Instrumental’s products can be grouped into two mainlines of business electric motors (EM) and electronic instruments (El). Both EM and El are industrial measuring instruments and perform almost identical functions. However, EM is based on mechanical and electrical technology, whereas El is based on the microchip.
Instrumental Ltd uses a variable costing system for internal reporting purposes.
30

Question
1. You are required to put yourself in Jennifer’s position and state what you would do next in terms of analysis of the situation.
Budget Actual
($000)
($000) Sales
16872 Cost of goods sold
9668 Gross margin
7204 Less
Operating expenses Marketing
1856 RD
1480 Administration
1340 4676 1674 Profit before taxes
2528 3150

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