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Abrams Company

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Abrams Company Abrams Company’s top management had three areas of concerns regarding the management control in its company.
a).The first concern was the disputes over the transfer pricing between three part-divisions and After Market division, especially for parts that exclusively sold to AM division. To reduce the dispute Abram’s top management to establish a fixed price for the exclusive parts, the fixed should cover the COGS and other expenses attributable to parts manufacturing plus divisional appropriate profit. The transfer price will be determined by adjusting the fixed price to resemble the price change caused by inflation. The fixed price determination must be established in conformity with all part divisions, AM division, and corporate level as the ultimate controller of company’s overall performance.
b) Product division too often treated the AM division as a captive customer.

The second focus of concern of the Abrams‘ top management was the behavior of part divisions, which captivated the AM division. Again, this is the consequence of Abrams Company organizational structure; the treat of divisions as profit centers, according to theory, will abdicate some control of top management since some decision makings authority are delegated to the lower level. This is the case in Abrams Company, where its division losing it synergy to reach companywide common goal. To overcome this problem Abrams Company needs to change its reward system, and plant managers will have a chance to raise its incentive from selling parts to AM division, and reduce the apparent problem.

c). Both the AM division and the three product divisions carry excessive inventories most of the year.
The third top management’s concern was related to the excess inventory. Both of these divisions must carry inventory to satisfy their customers. A way that they could combat this problem is by trying to predict what products they sell the most and when. If they see more of one product in the beginning of the year; they should produce more of that product in the beginning of the year and less of another product during that time. They should analyze the trends in the selling pattern to determine which products they need more or less of and when.

Question 2: Strengths of Abrams’s internal control system:
1. The ability to design innovative and dependable parts that met the customer’s quality, performance, and weight specifications; This is resulted from the good relationship between OEM sales department and OEM’s engineer within each division, which was made possible by the Abrams’ Co. organizational structure.
2. Treatment of each division as a profit centers will push the three part-divisions to remain innovative, while also paying attention to the revenue earned to cover costs and still determined to exceed the targeted ROI.
3. Applying profit center model will give up some responsibility from the corporate level to the divisional level, thus top management could focus their attention to broader strategic issues, such as diversifications or business expansions.
Weaknesses of management control system:
1. The company’s two of the three part-divisions were big enough to be said as business units, since their establishments were rooted from acquisition of independent companies. This would arouse the problem of losing synergy; the reason is because they were treated as autonomous division, and their performance measurement (ROI only) will induce manager to be the best independently, and mistakenly neglecting other division as such happened to AM division.
2. Split-up will impose additional costs because of the additional management, staff personnel, and record keeping required, and may lead to overlapping tasks between each divisions; this is not good for company’s overall performance.
3. Allocation of corporate expense in divisions’ profit calculation may entail some problems. If it allocate uniformed amount of expenses, it will hurt division that earned low profit; However, if the allocation is varied with each division’s earned profit, it will raise plant management dilemma, since the higher its profit, it will burdened with higher corporate expenses. Both problems, we argue, will lead to unsatisfactory working environment, and impose the risk of lower productivity.
Recommendation
1. Performance measurement in Abrams Co. should not rely heavily on financial performance alone, non-financial performance also must also be measured; for example by amount of excess inventory and relationship between divisions inside the company.
2. Abrams Co. top management should reviews its regulation of imposing corporate expenses into the divisions’ profit calculation. The company must study the trade-off between benefits that the top management believe (give clearer perspective of the costs of doing business, and added more realism to the plant’s result) and the pitfalls that our group concerns as in the weakness no.3; meaning investigating whether the implementation such regulations will have more benefits than if it is not.

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