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Ashish Menon

on 2 March 2015

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Transcript of ABRAMS COMPANY - Prezi

Management Control System
Abrams Company Overview
2. What is your overall evaluation of Abrams management control system?
Describe any strength or weakness that you identified but did not include in answering the previous question. What changes, if any, would you recommend to top management?
1. Case summary
Abrams Company Strategy
Several profit centers were created inside Abrams
Abrams sold its products by doing inside and outside sales
Targeting its sales to AM Marketing Division (up to 50% from total sales)
Annual ROI target based on actual profit divided by actual beginning-of-the-year net assets
The company has a clear management structure
The company has employed a bonus plan for employees
The company has many divisions with different product and sales department separately
The AM division buys partd from internal divisions thereby saving cost

No connection amongst the divisions
Transfer pricing issues for new products
Answer (contd)
Demand is increasing of the product
New technology was brought into the workplace
The company can expand this product range for other vehicles

Compensation base on ROI
Many competitors in the industry
- By:

Asmit Gavaskar (114)
Chirag Matalia (129)
Rohan Mehta (130)
Ashish Menon (134)
Parth Shah (151)
1. Case Summary
2. Main Issue
3. Problem Analysis
4. Recommendation
Abrams Company manufactures a wide variety of parts for use in automobiles, trucks, buses, and farm equipment
Abrams manufactures three major group of parts:
Ignition parts
Transmission parts
Engine parts
Abrams sells its products to:
Original equipment manufacturer (OEM)
Manufactured parts were sold by :
OEM Sales Department
AM Department
Abrams Company Overview
Inside and Outside Sales (1992)
Return on Investment (ROI)
Abrams must be able to design innovative and dependable parts that met the customer’s :
Weight performance
Meeting delivery schedule requirements
The dollar amount of the corporate wide bonus pool was established by a fixed formula linked to corporate earnings per share
Abrams Company’s Strategy
2. Abrams's management issues?
Evaluate each of the concerns expressed by top management, and if necessary, make recommendation appropriate to the circumstances described in the case
Incentive Compensation Plan
Many disputes over transfer price of parts sold by the product divisions to the AM division
Problem 1
Every division wants to make profit and focus only on their profit (profit competition).
Ignition, Transmission, and Engine parts division prefer to sell their products to OEM because they can get more profit and incentive.
AM's sales target set as 50% from outside sales.
Abrams Company decides
tranfers price
from Ignition, Transmission, and Engine parts division AM
The price for AM is cheaper than for the OEM so AM can make margin.
The transfer price must be updated every year while observing the inflation and price market.
AM division treated as captive customer by other divisions
Problem 2
Ignition, Transmission, and Engine parts division can sell to OEM and AM, but AM can sell only outside and cant sell other product except from the company
The incentive programs makes Ignition, Transmission, and Engine parts division prefer sell their product to OEM
Ignition, Transmission, and Engine parts division should have a target as to how many products they have to sell to AM.
Incentive compensation plan must be revised, and management should give more incentive to 3 division selling product to AM than to OEM, so AM can sell more product and reach their target
Always innovate using latest technology and improve Quality of product to compete with other competitor.
Use EVA rather than ROI
Make good Marketing Concepts so as to improve the sales.
Have a good inventory management.
Implement Just In Time (JIT) Inventory Management. The Inventory level must be maintained at its optimum level without many safety stock and implement zero-level-stock if possible
Calculating inventory turnover, EOQ (economic order quantity), and reorder point.
Excessive inventories of Abrams parts product
Problem 3
Product cannot compete with other competitors
Company only calculating ROI from begining-of-year with end-year profit which is not effective
Inventory stacked at the end of year, the production management must be flawed
= Incentive
= NO incentive
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