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Indigo Berhad is a large and successful producer of supercars. The company consists of two divisions: the Red-Line division and the Blue-Line division. Indigo has recently acquired a company which will become a third division. The new Black division is a small producer of accessories. It has been owned and managed by the same person for 35 years. The prior owner treated all employees as part of his family. The company was noted for the lack of a ‘them and us’ attitude between employees and management, and there was free and open communication between all staff. Unfortunately, Black division is not a strong performer: the accessories market is in decline and profits have slipped.
Indigo is known for its modern management system and would like all managers at Black division to participate in the performance-related pay system that is used in the other two divisions. The profit-sharing plan applies to senior divisional managers only. It is based on placing 10 percent of Indigo’s profit before interest and tax into a pool, which is then shared by the divisional managers in direct proportion to their base salaries. The senior managers in the two original divisions received bonuses of 11 percent and 12 percent of their salaries for the last two years before the acquisition of Black division.
The profit results for the first financial year following the acquisition of the Black division are provided below:
| Red-Line
(RM) |
Blue-Line
(RM) |
Black
(RM) |
|
| Sales revenue | 47,400,000 | 63,000,000 | 14,250,000 |
| Cost of goods sold | 15,000,000 | 36,000,000 | 6,750,000 |
| Gross margin | 32,400,000 | 27,000,000 | 7,500,000 |
| Administrative costs | 17,700,000 | 11,100,000 | 5,400,000 |
| Marketing and selling costs | 11,100,000 | 9,300,000 | 1,800,000 |
| Total costs | 28,800,000 | 20,400,000 | 7,200,000 |
| Profit before interest and taxes | 3,600,000 | 6,600,000 | 300,000 |
Senior management salaries included in the above costs, and divisional assets at the end of that year, are as follows:
| Red-Line
(RM) |
Blue-Line
(RM) |
Black
(RM) |
|
| Senior management salaries | 4,000,000 | 2,800,000 | 1,400,000 |
| Divisional assets | 8,000,000 | 8,000,000 | 1,600,000 |
Prior to the acquisition by Indigo, all Black division employees, including the senior managers, participated in a gainsharing program. Under this program, the financial impact of improvements in labour productivity and delivery performance were quantified each quarter, and 50 percent of this amount was accumulated in a pool. At the end of each year, each employee received an equal share of the pool. The scheme was discontinued when Indigo purchased Black division.
Required:
- a) Which division has the best performance in terms of profitand return on investment (ROI)in the first year after the acquisition?
(3 marks)
- b) Determine the bonus pool available for that year and calculate the percentage of bonus that each senior manager would receive.
(2 marks)
- c) Discuss the behavioural problems that could arise among the senior managers of the Red-Line and Blue-Line divisions as a result of the bonuses.
(3 marks)
- d) Discuss the behavioural problems that may arise within the Black division from the changes in the performance-related pay system.
(2 marks)
(10 marks)
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