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Performance Management — Practice Case 7
Case (120 minutes)
You, CPA, work as the assistant controller for A-Plus Corp (A-Plus). You are cu
ently
working on a project with the mergers and acquisitions group, which is responsible for
integrating the recent acquisition of Business Intelligence Management Inc. (BIM), a
portable PC producer with two geographical divisions: Saskatchewan and Alberta
(Appendix I).
It is May 7, 2022, and the CFO has recently discovered that the two divisional managers
esponsible for BIM’s operations are due to be paid their 2021 performance bonuses in
less than a week. The CFO provided you with the financial and non-financial data for
the operations in Saskatchewan and Alberta (Appendix II).
Both managers’ employment agreements state the following:
1. The bonus must be paid by May 13, 2022.
2. The bonus amount is capped at $110,000.
3. The bonus amount awarded must be justified in writing.
There hasn’t been a structured approach for determining the managers’ bonuses in the
past. Therefore, the CFO is debating between two bonus structures and has asked you
to discuss and calculate the bonuses under each option and provide a recommendation
on which bonus structure to use. Specifically:
1. The CFO would like you to assess what type of responsibility centre these two
divisions are, and to identify a relevant financial measure to assess performance of
the divisions based on that classification. He would like you to use the divisional
performance (related to that measure) to determine the managers’ bonuses.
2. The CFO would like you to draft a balanced scorecard that both divisions can use.
He would like you to assess each division’s performance based on that scorecard
and determine the managers’ bonuses based on the divisional performance.
The CFO also received a call from the Saskatchewan division manager about concerns
over divisional financial performance. The Saskatchewan division manufactures wafer
chips that it uses in its own products and also provides wafer chips to the Alberta
division for its production needs (Appendix I). The manager is concerned about the
impact of the transfer on her division’s financial performance. Specifically, the
Saskatchewan division manager is wo
ied how it will impact her bonus. The CFO has
asked you to recommend an appropriate transfer pricing policy and determine the
impact on divisional results.
Your response should be no longer than 3,600 words, excluding any Excel files.
Performance Management — Practice Case 7 Case
2 / 4
Appendix I
Background information

Until recently, A-Plus focused on sourcing no-name electronics from Asian countries
and then reselling these goods to electronics retailers in North America. On January 1,
2022, A-Plus expanded into electronics manufacturing by acquiring BIM, which
specializes in manufacturing portable PC devices, such as laptops. BIM employs 700
individuals.

BIM’s operations are divided into two geographical regions: Saskatchewan and Alberta.
The Saskatchewan division has three plants and the Alberta division has one central plant.

Portable PC device manufacturing is a mass production industry, with high volumes of
identical or similar products manufactured using assembly lines. Successful portable PC
device manufacturers turn over their inventory quickly due to the rapid pace of
technology changes. Products are generally made to order for customers — either other
electronics companies, which then place their own
and on the units and resell them,
or large national electronics retail chains, which place their store
and on the units and
esell them. Each division is responsible for developing its own customer base, meeting
sales targets, and managing costs.

Performance Management — Practice Case 7 Case
3 / 4
Appendix I (continued)
Background information

The manufacturing of portable PC devices is still a relatively labour-intensive process
ecause many of the components need to be assembled precisely. Although the
Saskatchewan division manufactures wafer chips in one of its plants, most of the
electronic components used in BIM’s manufacturing process are bought from third-party
suppliers. The employees who assemble the components are mainly semi-skilled and
have been trained by BIM to perform fairly simple, repetitive operations on the assembly
line. When the units are completed, the quality assurance department tests them, and
any units that are found to be faulty are returned to the assembly line and reworked.

Because quality is key, all electronic components received from suppliers are also
tested by BIM’s quality assurance department. They do not have the time to test every
component; therefore, they test a sample of components from each batch delivered. If
they find more than one faulty component in every 20 tested, the whole batch is rejected
and returned to the supplier. To maintain assembly line equipment in peak performance,
division managers must carefully maintain maintenance schedules and are responsible
for determining and budgeting for capital expenditure needs.

The Saskatchewan division manufactures the wafer chips needed in many of the
Alberta division’s products. The corporate policy of BIM’s previous executive team was
for the Saskatchewan division to sell the wafer chips to the Alberta division at $10 per
chip (Saskatchewan division’s average production cost). The external market price for
this type of wafer chip averaged $20 per chip in 2021. The Saskatchewan division is
cu
ently manufacturing wafer chips at capacity, and if it did not have to supply the
Alberta division’s operations, it could have sold all 330,000 chips delivered to the
Alberta division to external companies in 2021.

BIM’s effective corporate tax rate is 11%.
Performance Management — Practice Case 7 Case
4 / 4
Appendix II
2021 Manufacturing divisional performance

Saskatchewan Alberta
Financial information
2021
Actual
(in ’000s)
2021
Budget
(in ’000s)
2021
Actual
(in ’000s)
2021
Budget
(in ’000s)
Sales of mobile PC products $355,200 $380,835 $188,000 $181,925
Total production costs $116,100 $116,835 $59,300 $61,200
Net operating profit after tax $130,400 $158,000 $74,300 $76,450
Total assets (average) $1,094,000 $1,020,400 $423,500 $412,780
Finished goods, raw materials,
and WIP inventories (average) $30,400 $17,900 $10,020 $9,385
Saskatchewan Alberta
Other information
2021
Actual
2021
Budget
2021
Actual
2021
Budget
Sales (in units) 649,000 651,000 367,000 365,000
Average sales price per portable
PC unit $547/unit $585/unit $512/unit $498/unit
New portable PC products
developed and tested 12 10 — —
New portable PC products
successfully
ought to market XXXXXXXXXX
% of purchases from supplier
ejected 4.8% 3.0% 2.8% 3.0%
Number of employees (average XXXXXXXXXX
Employee absenteeism (% of
total working days) 2.0% 2.1% 1.9% 2.1%
Employee turnover 10.3% 5.1% 5.6% 5.1%
Annual customer survey —
“value for money” (5 = Excellent XXXXXXXXXX
Number of wa
anty claims by
customers (per 1,000 units sold XXXXXXXXXX

pem-2201e-pc07case-uqmre3mz.pdf

Sandeep · Accepted Answer

Performance Management 		2
PERFORMANCE MANAGEMENT
A responsibility centre is defined as any SBU, Business unit, or functional entity within a business that has its own goals, mission and objectives, devoted staff, policies, procedures, and financial management reports. The concept of a Responsibility centre is meant to entrust the manager of the SBU or division with accountability or responsibility of delivering the projected revenue targets, managing cost control, and wisely investing the funds available. A responsibility centre is also an operational unit or independent unit to which resources are allocated via budgets making it accountable for all activities and tasks structured for the unit. In other any unit to which resources are allocated the Organization demand to know, how it intends to utilize or invest it for earning ROI and revenue stream cash flows.
The responsibility centre can be categorized bearing in mind two essential factors. These are the scope of accountability assigned and decision-making authority given to the unit head/ Divisional managers. There are four types of responsibility centres:
· Cost or Expense centre 
· Revenue centres 
· Profit centre
· Investment centre
Expense centre – It is the segment and division of an entity in which the managers will be held accountable for all costs incurred in that business segment or unit, but not usually responsible for the revenue of that unit. In a manufacturing organization, the production and services departments are classed as expense centres, whereas the marketing sales region or sales representative may be counted as expense centres. Such cost centre managers are responsible for costs controllable by them. Further, there are two types of expense centres as 
· Engineered expense centre – defined as an element of cost that can be predicted with a fair degree of precision e.g., cost of raw materials, direct labour, water, electricity, etc.
· Discretionary expense centres – Costs whose output cannot be measured in monetary terms e.g., administrative and support departments/ functions within an organization like Finance, legal, R&D, PR, etc.
Revenue Centre – It is that segment of the organization that is primarily responsible for generating or earning sales revenue. Such a division manager has control over the expense of the marketing department, but he has no control over the costs. The performance of the revenue managers will be assessed by comparing the actual revenue with the budgeted or projected revenue and actual marketing expense with projected expenses. 
Profit centre – It is defined as that part of the business division or segment which is responsible both for revenue and expense. However, in the not-for-profit organization where profit is termed as a sin, revenue centres may be employed in place of a profit centre to avoid being labelled as profit-driven organization. The main objective or goal of a profit centre is to earn maximum targeted profit for its investors. Their entire resources or efforts are attuned to finding ways to enhance division revenue by scaling up production facilities or improving distribution methods. The performance of the profit centre manager is measured in terms of whether the centre has achieved the budgeted or Targeted profit.
Investment centre – This segment of the business is accountable for the profits and investment. If the centre manager controls investment, that area of responsibility can be called an investment centre. Such a manager will be responsible for the Return on Investment, thereby controlling investment in the assets.
As has been indicated that BIM is highly sophisticated in manufacturing portable PC devices, such as laptops. BIM employs seven hundred individuals. As clearly mentioned in the passage Portable PC device manufacturing Is a mass production industry, selling a high volume of identical or similar characteristics products produced using assembly lines. Successful Portable PC device manufacturer turns over their inventory quickly due to the rapid pace of technology changes. Products are usually made to order or customized for customers or other electronic companies which then place their own label/Brandon on the units and resell them or a large national retail chain places their store brand on the units and resells them. Such an industry is characterized by the Saskatchewan division manufacturing wafer chips that it uses in its products and provides wafer chips to the Alberta division for its production needs. Each division is responsible for developing its customer base, meeting sales targets, and managing costs. The responsibility accounting implies that the divisional manager should be held responsible for all those items or activities that they are entrusted with or can control.

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