Page 88 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Unit 4: Responsibility Centers

Notes
Example: Following are the multiple goal structure of General Electric Company:
(i) Profitability, (ii) Market position, (iii) Productivity, (iv) Product leadership, (v) Personnel
development, (vi) Employee attitudes, (vii) Public responsibility, (viii) Balance between long-
range and short-range goals.
The above multiple goal structures reveal the following:
1. Some of the goals are amenable to reasonably objective quantitative measurement while
others are not.

Example: Profitability and productivity can be reasonably measured, whereas, employee
attitude and public responsibility are not easily quantifiable.

2. There is some internal inconsistency among the goals e.g. efforts to raise productivity
may dampen employee morale. Efforts to fulfil somewhat internally inconsistent and
inadequately articulated goals can be frustrating and confusing. The optimum balance
may be hard to establish.
Problem 1: A large automobile company follows a pricing policy whereby “normal” or “standard”
activity is used as a base for pricing. That is, prices are set on the basis of long-run annual volume
predictions. They are then rarely changed, except for notable charges in wage rates or material
prices. You are given the following data:
Material, wages and other variable costs ` 1320 per unit
Fixed overhead ` 300,000,000 per year
Desired rate of return on invested capital 20%
Normal volume 10,00,000 units
Invested capital ` 900,000,000

Required:
1. What net income percentage based on rupee sales is needed to attain the desired rate of
return?

2. What rate of return on invested capital will be earned on sales volumes of 1500,000 and
500,000 units respectively?
Solution:
1. Net income 20% of 900, 000, 000 ` 180,000,000
Fixed overhead ` 300,000,000
Total contribution = net income + fixed overhead ` 480,000,000
Contribution per unit = ` 480,000,000 – 1,000,000 = ` 480
Materials wages and other variable are ` 1320/unit
Sales 1800 per unit
`
Hence, total sales = 1800  1,000,000 = 1800,000,000 = 

Therefore, net income as percentage of rupees sales
2.
Sales volume 1500,000 units 500,000 units
Contribution on sales volume ` 720,000,000 ` 240,000,000
Fixed overhead ` 300,000,000 ` 300,000,000
Net income ` 420,000,000 ` – 60,000,000
Return on invested capital 46.67% (–) 0.07%

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