Mba Apr07 Mgt Ctl Sys

Question Paper Management Control & Information Systems (MB281) : April 2007 Section A : Basic Concepts (30 Marks) • This section consists of questions with serial number 1 - 30. • Answer all questions. • Each question carries one mark. • Maximum time for answering Section A is 30 Minutes.

1.

Strategic planning consists of two aspects – goal setting and strategy formulation. Strategic planning involves long term planning and is carried out at the top level of management. Which of the following are the characteristics of Strategic planning?

< Answer >

I. Strategic planning is irregular in nature. II. The process of strategic planning is greatly affected by turbulence in external environment. III. It is extremely difficult to appraise the performance of strategic planning, as there are no prescribed standards against which performance can be measured. IV. There are sophisticated techniques available which can exactly measure the performance of the strategic planning. (a) (b) (c) (d) (e) 2.

Which of the following is defined as “a science of communication and control”? (a) (b) (c) (d) (e)

3.

< Answer >

Executive committee Operating management committee Strategy committee Reward committee Investment committee.

While evaluating the performance of all its business units using variance analysis an organization is mainly concerned with (a) (b) (c) (d) (e)

< Answer >

Cybernetics Industrial dynamics Strategic planning Strategic formulation Budgeting process.

Which of the following committees of an organization deals with the goals, strategies, plans and action programs? (a) (b) (c) (d) (e)

4.

Both (I) and (II) above Both (II) and (III) above Both (I) and (III) above (I), (II) and (III) above (I), (II) and (IV) above.

< Answer >

Revenue variances and profit variances Revenue variance and sales variance Profit variance and sales variance Revenue variance and expense variances Expense variances and sales variances.

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5.

< Answer >

Consider the following information: Standard price of material Actual output Material used Actual cost of material

Re.1 2,10,000 kg. 2,80,000 kg. Rs.2,52,000

If the material consumption standard is 100 kg. for 70 kg. of finished product then, material usage variance in this will be (a) (b) (c) (d) (e) 6.

Which of the following incentives can be termed as psychological and social incentives for a manager? I. II. III. IV. (a) (b) (c) (d) (e)

7.

9.

Both (I) and (II) above Both (I) and (III) above Both (I) and (IV) above Both (III) and (IV) above Both (II) and (IV) above.

< Answer >

Transportation costs Transaction costs Sunk costs Deferred costs Overhead costs.

A control system is a set of formal and informal systems that are supposed to assist the management in steering the organization towards the achievement of its purpose. Which of the following is not an example of formal control? (a) (b) (c) (d) (e)

< Answer >

Specialization and division of labor Motivation and distribution of labor Integration and organization Line and staff Style and culture.

Organizations are divided into subunits. Subunits comprise individuals who perform certain activities to fulfill the purpose of the organization. The control systems play a major role in coordinating the efforts of these subunits. The cost of coordinating the efforts of these subunits may be referred as (a) (b) (c) (d) (e)

< Answer >

Increased responsibilities. Increased perquisites. Increased autonomy. Increased bonuses.

Organizations are divided into subunits. Subunits comprise individuals who perform certain activities to fulfill the purpose of the organization. The subunits are based on the principles of (a) (b) (c) (d) (e)

8.

Rs.20,000(F) Rs.23,000(F) Rs.25,000(A) Rs.20,000(A) Rs.23,000(A).

< Answer >

Plans Budgets Regulations Quotas Group norms.

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10. Which of the following kinds of control mechanism is used in production planning? (a) (b) (c) (d) (e) 11.

Open loop control mechanism Closed loop control mechanism External control mechanism Internal control mechanism Mixed control mechanism.

An important function of key variables is that they indicate to the management the necessity for prompt action. A manager should identify a few variables that are crucial to the attainment of strategy, goals and objectives of an organization. Which of the following is the most common method of identifying key variables? (a) (b) (c) (d) (e)

< Answer >

Financial accounting Cost accounting Uniform accounting Environmental accounting Inflation accounting.

15. According to Forrester, “An industrial organization is a complex, interlocking network of information channels. These channels emerge at various points to control physical processes such as hiring employees, building factories and producing goods.” Which of the following models represents the physical flow of all activities as well as information flows, along with decision points? (a) (b) (c) (d) (e)

< Answer >

Financial accounting Cost accounting Responsibility accounting Environmental accounting Inflation accounting.

14. Which of the following aims to provide cost data for managerial planning, controlling and decision making and gives a complete explanation of how scarce inputs are put to use in business? (a) (b) (c) (d) (e)

< Answer >

Ratios Variances Business units Key variable Industry characteristics.

13. Which of the following helps managers to trace costs, revenues and profits in order to enable them to arrive at right decisions? (a) (b) (c) (d) (e)

< Answer >

Cybernetic model Industrial dynamics model System theory model Input-through-output model TQM model.

12. Which of the following is a significant indicator of business activity, whose sudden and unpredictable change warrants immediate action by management? (a) (b) (c) (d) (e)

< Answer >

< Answer >

Industrial dynamics Systems theory Cybernetic theory Managerial grid Motivational.

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16. Which of the following provides a framework or structure of systems based on which particular discipline and particular subject matters can be visualized and developed in the interest of an organization? (a) (b) (c) (d) (e)

Systems theory Dynamic theory Cybernetic theory Management theory Motivational theory.

17. Informal control processes are formed as a result of interaction between people. The informal control process helps in the development of new goals and objectives. Which of the following is one of the mechanisms for control through informal systems? (a) (b) (c) (d) (e)

< Answer >

Group loyalty Motivation Financial security Environmental security Frustration.

21. The basic purpose of responsibility accounting system is (a) (b) (c) (d) (e)

< Answer >

Training Motivation Indoctrination Formal planning Recognition.

20. A control system should support the prevailing style of the top management and blend into the way an organization and its management chooses to do its work. It is important to know what kind of control system is needed to improve the steering and coordinating functions of the organization. Welldeveloped control systems should fit into the prevailing culture of the organization. The common values shared by the people in an organization about its activities facilitate control by developing a sense of (a) (b) (c) (d) (e)

< Answer >

Acceptance Status Desired association Pride of workmanship Bonus.

19. Which of the following processes is used by the organization to socialize members to its values, procedures and policies? (a) (b) (c) (d) (e)

< Answer >

Committees TQM Ad hoc teams Quality circles Task force.

18. One of the essential functions of an executive is to induce individuals to participate in the various activities of an organization. He can do that by offering an appropriate incentive program. Which of the following is not a non-financial incentive? (a) (b) (c) (d) (e)

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Control Budgeting Motivation Authority Variance analysis.

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22. Which of the following is/are particularly associated with operating a system of transfer pricing? I. II. III. IV.

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Ensuring that goal congruence is retained among the organization’s separate divisions. Ensuring that divisional performance measurement is not affected. Ensuring that corporate profits are maximized. Ensuring that the group remains competitive.

(a) (b) (c) (d) (e)

Only (I) above Only (IV) above Both (II) and (III) above (I), (II) and (III) above All (I), (II), (III) and (IV) above.

23. Profitability of a profit center can be measured in terms of (a) (b) (c) (d) (e)

Contribution margin and return on equity Contribution margin and residual income Return on capital employed Return on investment Contribution margin, income before taxes, direct divisional profits and net income.

24. A company has recently introduced a compensation system for its managers based on a management by objectives (MBO) approach. The essential premise of MBO is that (a) (b) (c) (d) (e)

< Answer >

Employees should participate in setting goals Compensation should not be based on quantitative factors Managers should establish goals for their employees Employees should concentrate only on routine matters and managers should attend to exceptions Top management should establish goals for all levels in the organization.

25. Which of the following would generally cause controllable variances? (a) (b) (c) (d) (e)

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< Answer >

Unexpected market demand Suppliers price increase Company’s marketing policy Industry wage rate increase Inflation.

26. A company invested in an asset which has a useful life of 3 years. The company’s expected rate of return is 10%. The cash flow for the 3 years are as follows:

< Answer >

Cash inflow from the asset 1 Rs. 8,000 2 Rs. 9,000 3 Rs.10,000 All cash inflows are assumed to occur at year-end. If the asset generates positive net present value of Rs.2,000, the amount of the original investment was Year

(a) (b) (c) (d) (e)

Rs.28,345.60 Rs.22,225.50 Rs.20,223.40 Rs.20,000.00 Rs.19,990.10.

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27. Three companies – Perfect Ltd., Progressive Ltd. and Pioneer Ltd., are competitors in the sleeping-bag industry. Basic comparative data for the year 2006-2007 are as follows: Company Perfect Ltd. Progressive Ltd. Pioneer Ltd.

Operating assets (Rs.) 30,00,000 40,00,000 32,00,000

Operating costs (Rs.) 48,00,000 38,00,000 32,00,000

Net sales (Rs.) 54,00,000 42,00,000 40,00,000

< Answer >

The returns on capital

employed of Perfect Ltd., Progressive Ltd. and Pioneer Ltd. are (a) (b) (c) (d) (e)

30%; 20% and 25% respectively 20%; 25% and 10% respectively 25%; 20% and 10% respectively 25%; 20% and 30% respectively 20%; 10% and 25% respectively.

28. Division A of TP Ltd. is operating at full capacity. It manufactures and sells 12,000 units of Product “SQ” in a perfectly competitive market. Revenue and cost data are as follows: Particulars Variable cost per unit Fixed cost

< Answer >

Rs. 45 6,00,000

Sales value

15,00,000 The minimum transfer price per unit that should be charged by Division A to other divisions of the company is (a) (b) (c) (d) (e)

Rs. 45 Rs. 50 Rs. 95 Rs.115 Rs.125.

29. Consider the following data pertaining to Nandini Ltd. for 1,000 units of product-N which requires two raw materials – A and B: Standard material cost per unit: Material A 2 kg. at the rate of Rs.10 = Material B 3 kg. at the rate of Rs.20 = Materials issued: Material A 2,050 kg. at a cost of Rs.43,050 Material B 2,980 kg. at a cost of Rs.56,620 The total material usage variance is (a) Rs.900 (A) (b) Rs.900 (F) (c) Rs.500 (A) (d) Rs.400 (F) (e) Rs.100 (A).

< Answer >

Rs.20 Rs.60

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30. Consider the following data pertaining to production department in Skylab Ltd. for the month of March 2007: Actual overhead costs Standard hours for actual work Actual hours during the month Standard overhead rate (a) (b) (c) (d) (e)

Rs.11,000 4,500 hours 5,000 hours Rs.2 per hour

< Answer >

The overhead variance is

Rs.2,000 (F) Rs.2,000 (A) Rs.1,500 (F) Rs.1,000 (A) Rs.1,000 (F).

END OF SECTION A

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Section B : Caselet/Problems (50 Marks) • This section consists of questions with serial number 1 – 6.

• Answer all questions. • Marks are indicated against each question. • Detailed explanations/workings should form part of your answer. • Do not spend more than 110 - 120 minutes on Section B.

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Caselet 1 Read the caselet carefully and answer the following questions: 1.

What are the advantages and disadvantages of planning under a decentralized system such as Sysco’s?

< Answer >

(8 marks) 2.

Discuss the corporate level strategies in the context of Sysco. (6 marks)

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In 1969, John Baugh, president of Houston based Zero Foods, persuaded a former Ford Motor and Cooper Industry executive, John Woodhouse, and the owners of eight other food wholesalers to form a national food distribution company. That company, Sysco (the name comes from Systems and Services Company), is now more than seventy times as large as it was when it was founded with more than 24,000 employees and $10 billion in sales. Sysco is the largest marketer and distributor of food service products in the United States. Its more than 3,000 suppliers come from several countries. It has about sixty operating companies selling 150,000 products to a quarter of a million customers in North America. In late 1992, Sysco expanded its customer base and product offerings to include medical and surgical supplies when it contracted with a major Memphis, Tennessee, hospital group for $25 million worth of annual business. Restaurants comprise more than half of Sysco’s sales, and hospitals and nursing homes make up more than 10 percent. Schools and colleges along with hotels and motels also account for more than 10 percent of sales. Sysco’s growth has been not only through internal expansion but also through a total of more than forty carefully chosen acquisitions. Each acquired firm must be profitable, and the management must plan to stay. Indeed, part of every purchasing price is to be earned through future profits of the firm as a Sysco operating company. Although Sysco tends to sell any manufacturing parts of acquired companies, it also tends to treat each acquisition as a new partner in the business and maintains a decentralized managerial planning and operating system. This decentralized system is necessary to ensure that Sysco accounts for local tastes–chicory coffee in Louisiana and baked beans in molasses in New England–as well as fosters innovation. Indeed, Sysco’s move into medical supplies actually began when the Nebraska sales force began shipping supplies to nursing homes because their customers were unhappy with their regular suppliers. Sysco’s Tennessee unit in Memphis restricted salespeople to certain geographic districts in an effort to reduce travel time and thereby increase selling time. It worked. Its success led to its adoption by other Sysco operating companies. Despite the success of these endeavors, however, no operating manager has been ordered to adopt them. The heads of the operating companies are free to adopt or not adopt such practices as they see fit. Pay-for-performance is one of the few central policies employed by Sysco. Bonuses for all managerial personnel are based on exceeding planned levels of profits as a percentage of revenues and return on capital. That ensures that everyone is striving for the same set of objectives for the overall organization. Sysco continues to expand, although it also prunes units that prove not to be profitable. It expects to continue to maintain its performance, especially because it is several times the size of its top five competitors added together.

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3.

The projected cash flows from two mutually exclusive projects X and Y are as under: Project

< Answer >

1 to 7 years Project life (inflow) (Rs.) (years) X 2,20,000 60,000 each year 7 Y 2,70,000 70,000 each year 7 a. Advice on project selection with reference to internal rate of return.

b.

0 (outflow) (Rs.)

Will it make any difference in project selection, if the cash flow for project Y is 8 years instead of 7 years @ Rs. 70,000 each year? (6 + 3 = 9 marks)

4.

Gresham Ltd., producing a range of minerals, is organized into two trading groups - wholesale business and sales to retailer. One of its products is moulding clay. The wholesale group extracts the clay and sells it to external wholesale customers as well as to the retail group. The production capacity is 2,000 ton per month but at present sales are limited to 1,000 ton wholesale and 600 ton retail.

< Answer >

The transfer price was agreed at Rs.200 per ton in line with external wholesale trade price on 1st July that was the beginning of the budget year. As from 1st December, however, competitive pressure has forced the wholesale trade price down to Rs.180 per ton. The members of the retail group contend that the transfer price to them should be the same as for outside customers. The wholesale group refutes the argument on the basis that the original budget established the price for the whole year. The retail group produces 100 bags of refined clay from each ton of moulding clay, which it sells at Rs.4 a bag. It would sell a further 40,000 bags if the retail trade price were reduced to Rs.3.20 a bag. Other data relevant to the operation are: Particulars

Wholesale Group

Retail Group

Variable cost per ton

Rs.70

Rs.60

Fixed cost per month

1,00,000

40,000

Being

a finance controller, you are required to a.

Prepare estimated profitability statements for Gresham Ltd. as a whole based on transfer prices of Rs.200 per ton and of Rs.180 per ton when producing at 80% capacity and 100% capacity levels, utilizing extra sales to supply the retail trade and the effect of the change in the transfer price.

b.

Comment on the results achieved under (a). (8 + 3 = 11 marks)

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Caselet 2 Read the caselet carefully and answer the following questions: 5.

The practice of having a shop of specialists to take care of quality problem at the end of the assembly was neither effective nor economic. Comment.

6.

How was the workplace reorganized to tackle the issue of defecti products? Why do you think the move failed to solve the problem?

One of the problems that had long concerned the top managers of Kia Motor Seoul, was the lack of workers’ interest in doing their jobs on both the compo final car assembly lines with the result that quality had to be ensured by department. For the cars that couldn’t pass final inspection, the company’s onl to set up groups of highly skilled mechanics in a special shop where quality p fixed at the end of the line. Not only was this costly but it also caused conside since most of the problems were the result of carelessness in assembling comp the design of the automobile itself. At the urging of the company president, the division general manager called a key department heads to see what could be done about the problem.

John Koo, production manager, claimed that some of the problems were engineering. He held that if only engineering would design components and t carefully enough, many quality problems would disappear. He also blamed department for not selecting workers more carefully and for not getting the u agent involved in the problem. He pointed out especially that there was a high t than 5 percent per month, among assembly workers and that absenteeism on M reached 20 per cent. His position was that no production department could oper with this kind of labor force.

Kim Jung, chief engineer, held that the components and cars were engineered w claimed that if engineering tolerances were any stricter, the fitting of parts difficult and time-consuming that the company’s automobiles would be too costl

Chan Kim, the personnel manager, accounted for the personnel problems in First, she pointed out that her department had little or no control over whom hired or kept in view of the strong labor union the company had. Second, she assembly work was dull, deadening drudgery and that the company should not to have much interest in this work beyond their paychecks. But Ms Kim did convinced that the company could develop more worker interest, and conseq quality work and less absenteeism and turnover, if assembly jobs were enlarged for suggestions, Ms Kim recommended that the company do two things: (1) hav handle several operations on the assembly line with employees working in tea doing only one task, and (2) rotate workers each week from one location on completely different one in order to give them new and more challenging suggestions were adopted and put into effect. To everyone’s surprise, the work great dissatisfaction with the new program. After a week, the assembly line because of a strike. The workers claimed that the new program was only a scheme to get them to do more work than they had done before and to train th other workers without any increase in pay. The division manager and the perso were surprised. When asked by the division manager what had happened, Ms K say, “ This is a mystery to me. We make their jobs more interesting and they strik END OF

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SECTIO NB

Section C : Applied Theory (20 Marks) • This section consists of questions with serial number 7 8.

• Answer all questions. • Marks are indicated against each question. • Do not spend more than 25 -30 minutes on section C.

7.

Zero-Based Budgeting (ZBB) approach aims at asking the manager to r evaluate the activities and then formulate the entire budget for his/h responsibility center. To make ZBB successful, managers need to be caref about the possible limitations. In this context, explain how ZBB is benefici to the managers and also identify the limitations of ZBB

8.

Audits not only provide a way of clarifying the areas requiring informatio but also suggest the most productive methods of eliciting, organizing an presenting that information. In this context, what are the benefits organization derives from a corporate audit? How can it help to provi competitive advantage to the organizations?

END OF SECTIO NC

END OF QUESTION PAPER

Suggested Answers Management Control & Information Systems (MB281) : April 2007 Section A : Basic Concepts

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1.

Reason:

2.

The statements; strategic planning is irregular in nature, the process of strategic planning is greatly affected by turbulence in external environments and it is extremely difficult to appraise the performance of strategic planning as there are no prescribed standards against which the performance can be measured. Hence (d) is correct. < TOP >

Answer : (a) Reason:

3.

< TOP >

Answer (d)

N.Wiener has coined the term ‘Cybernetics’ and is defined as “a science of communication and control”. This concept is now extensively applied in the fields of engineering and biology. Hence, option (a) is correct. < TOP >

Answer : (c) Reason : Strategy Committee of an organization deals with the goals, strategies, plans and action programs. Hence, option (c) is correct.

4.

< TOP >

Answer : (d) Reason : An organization in evaluating its performance and undertaking corrective measures basically divides their performance by way of studying its revenue and expense variances.

5.

< TOP >

Answer : (a) Reason : Standard quantity for actual input = 2,10,000÷0.7 = 3,00,000 Material usage variance=(SQ – AQ) × SR = (3,00,000 – 2,80,000) × Re.1 = 20,000 (F)

6.

< TOP >

Answer :(b) Reason : Increase in salary, bonuses, benefits, etc are termed as financial incentives given to the manager and psychological and social incentives given to a manager include increased responsibilities, increased autonomy and a better geographical location

7.

< TOP >

Answer : (a) Reason : The subunits are based on the principles of specialization and division of labor. Hence option (a) is correct.

8.

Reason: 9.

< TOP >

Except group norms all the other options are the examples of formal control systems. Hence (e) is correct. < TOP >

Answer : (b) Reason:

11.

The cost of coordinating the efforts of these subunits may be referred as transaction costs. Hence option (b) is correct.

Answer : (e) Reason:

10.

< TOP >

Answer : (b)

Closed loop control mechanism is generally applicable to operations like inventory control, production planning and control. < TOP >

Answer : (d) Reason:

Input-through-output model is most common method of identifying key variables. Hence, option (d) is correct.

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12.

Reason: 13.

< TOP >

Systems theory provides a framework or structure of systems based on which particular discipline and particular subject matters can be visualized and developed in the interest of the organization. < TOP >

Ad hoc teams is one of the informal mechanisms. Other options are related to formal teams. Hence, option (c) is correct. < TOP >

Except bonus all the remaining options are non-financial incentives. Hence, option (e) is correct. < TOP >

The process used by the organization to socialize members to its values, procedures and policies is called indoctrination. Hence, option (c) is correct. < TOP >

Answer : (a) Reason:

21.

Industrial dynamics models represent the physical flow of all activities as well as information flows, along with decision points. Remaining options are not related to the question. Hence, option (a) is correct.

Answer : (c) Reason:

20.

< TOP >

Answer : (e) Reason:

19.

Cost accounting aims to provide cost data for managerial planning, controlling and decision making and gives a complete explanation of how scarce inputs are put to use in business. Hence, option (b) is correct.

Answer : (c) Reason:

18.

< TOP >

Answer : (a) Reason:

17.

Responsibility accounting helps managers to trace costs, revenues and profits in order to enable them to arrive at right decisions. Hence, option (c) is correct.

Answer : (a) Reason:

16.

< TOP >

Answer : (b) Reason:

15.

Key variable is a significant indicator of business activity, whose sudden and unpredictable change warrants immediate action by management. Hence, option (d) is correct.

Answer : (c) Reason:

14.

< TOP >

Answer : (d)

The common values shared by the people in an organization about its activities facilitate control by developing a sense of group loyalty. Hence, option (a) is correct. < TOP >

Answer : (b) Reason : The basis of a responsibility accounting system is the designation of each subunit in an organization as a particular type of responsibility center. The performance of each responsibility center is summarized periodically on a performance report. It shows the budgeted and actual amounts of key financial results appropriate for the type of responsibility center involved. Therefore, the main purpose of responsibility accounting is budgeting.

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22.

< TOP >

Answer : (e) Reason : A balance needs to be kept between divisional autonomy to provide incentives and motivation, and retaining centralized authority to ensure that the organization’s divisions are all working towards the same targets, the benefit of the organization as a whole. It ensures the goal congruence, divisional performance in different division and maximize the corporate profit. Therefore (e) is correct.

23.

< TOP >

Answer : (e) Reason : Contribution margin, income before taxes, direct divisional profits earned by a profit center and net income indicate that the center is running on a profitable basis.

24.

Answer : (a) Reason : MBO is the process by which a manager and his/her subordinates work together to formulate the objectives and goals of the subordinate. Option (b) is incorrect because MBO goals may be set in terms of quantitative measures. Options (c) and (e) are not correct because goal setting should be participative.

< TOP >

Option (d) is incorrect because it describes management by exception. 25.

< TOP >

Answer : (c) Reason : The variances caused by unexpected market demand, increase in prices, industry wage rate increase and inflation are uncontrollable. However the variance caused by company’s marketing policy is controllable. Hence the answer is (c).

26.

Answer : (c) Reason : The net present value of a proposed investment is computed by subtracting the original investment from the present value of future cash flows.

< TOP >

Let, original investment = X Therefore, 8000 × 0.9091 + 9,000 × 0.8264 + 10,000 × 0.7513 – X = Rs.2,000 or, Rs.7,272.8 + Rs.7,437.6 + 7,513.0 – X = Rs.2,000 or, X = 20,223.40. Therefore the original investment = Rs.20,223.40 27.

< TOP >

Answer : (e) Reason : Perfect Ltd. Progressive Ltd. Pioneer Ltd.

28.

= =

54  48 54   20% 54 30

42  38 42   10% 42 40

=

40  32 40   25% 40 32

< TOP >

Answer : (e) Reason : Minimum transfer price, if the division is in a full capacity and product is in a perfectly competitive market, is the sale price of Rs.125, i.e. Rs.15,00,000 ÷ 12,000 units = Rs.125 per unit

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29.

Material A

Material B

= =

Rs.10 (2,050 kgs ~ 1,000 units × 2kgs) Rs.10 × 50 kgs =

= =

Rs.20 (2,980 kgs ~ 1,000 units × 3 kgs) Rs.20 × 20 kgs =

Material usage variance 30.

< TOP >

Answer: (e) Reason : Material usage variance = Standard rate (Actual quantity ~ Standard quantity) Rs.500 (Adverse) Rs.400 (Favorable ) Rs.100 (Adverse)

< TOP >

Answer: (b) Reason : Actual overheads cost Less: Applied overhead cost = (Standard hours for actual work × standard overhead rate)4,500 hours × Rs.2 Overhead cost variance

Rs.11,000 Rs. 9,000

Rs. 2,000 (Adverse)

Other options (a), (c), (d) and (e) are not

correct.

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Section B : Problems/Caselets

17

1

Advantages of decentralization

< TOP >

i. Relieves the top-level management of some burden of decision-making. ii. Encourages decision-making and assumption of authority and responsibility iii. Gives managers more freedom & independence in decision-making. iv. Promotes establishment and use of broad controls that increases motivation. v. Comparisons of different departments made possible. vi. Facilitates setting up of profit centers vii. Facilitates product diversification viii. Facilitates the development of general managers. ix. Aids in adapting to changing environments. Limitations of Decentralization: i. It becomes difficult to have a uniform policy. ii. More complexity in coordination of decentralized units iii. The upper-level management may lose control iv. May be limited by inadequate control techniques v. May be constrained by inadequate planning and control system. vi. Can be limited by availability of qualified managers. vii. Involves considerable expenses on training for managers viii. May be limited by external sources, such as government. ix. Economies of scale of operations may not favor. 2

Corporate level strategy addresses the businesses that the organization will be in and how the strategies of those businesses will be coordinated to strengthen the firm’s competitive position and also for a better allocation of resources among businesses. A company, such as Sysco, which is operating in different lines of businesses with about sixty operating companies, cannot do without a corporate strategy. Sysco seems to follow a value based approach. Value based strategies provide general guidelines rather than a narrowly focused plans. That is why the heads of operating companies are given freedom to adopt a policy or practice of their choice while they contribute to the overall organizational goals.

< TOP >

3.

(i) Project selection based on internal rate of return. The present values of projects A and project B is calculated as follows: Discount PVIFA Project X Project Y Rate For 7 yrs. Cash inflow P.V. Cash inflow P.V. p.a. (Rs.) (Rs.) p.a.(Rs.) (Rs.) 15% 4.1604 60,000 2,49,624 70,000 2,91,228 16% 4.0386 60,000 2,42,316 70,000 2,82,702 17% 3.9224 60,000 2,35,344 70,000 2,74,568 18% 3.8115 60,000 2,28,690 70,000 2,66,805 19% 3.7057 60,000 2,22,342 70,000 2,59,399 20% 3.6046. 60,000 2,16,276 70,000 2,52,322 (a) X Since the original investment in project X is Rs. 2,20,000, its IRR will fall between 19% and 20%

< TOP >

P.V. of cash inflows at 19%

2,22,342

P.V. of cash inflows at 20%

2,16,276

Difference

6,066

Project

Now, IRR of project X is calculated as follows, by applying

formula for interpretation: IRR  19 

2, 22, 342  2, 20, 000  19.4%(approx) 6, 066

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