MANAGEMENT CONTROL SYSTEM

ABRAMS MANUFACTURING

PREPARED BY GROUP 2
1) Agung Santoso
2) Ahmad Fahmi Mubarok
3) Banyu Bening

M A S T E R O F B U S I N E S S A D M I N I S T R A T I O N, U G M J A K A R T A

Table of Content

01

Case Summary

02

Main Issue

03

Problem Statement

04

Analysis of Solution Alternatives

05

Recommendation

Case Summary

$100 mio

Percentage of Sales

Abrams Company
Abrams is COMPANY MANUFACTURER a wide variety

Ignition
Parts
Sales $130
mio

parts for use in automobiles, trucks, buses, and farm

equipment.

26%

Transmission Parts
Sales $100 mio

36%

Abrams 4 Divisional :
Ignition Parts

Engine Parts
As an
OEM

Sales $90 mio

20%

Transmission Parts
Engine Parts

As an
OEM

Ignition

Transmis
sion

Engine

AM
Marketing

AM Marketing

18%

Internal Sales $100 mio

Sales $180 mio
INCENTIVE COMPENSATION PLAN
Ignition

As an
OEM

Eksternal
Sales

AM Marketing

OEM

= INCENTIVE

AM
Marketing

INCENTIVE

Engine
Transmission

Case Summary
Return of Investment

TARGETED RETURN ON INVESTMENT (ROI)

TARGETED ROI = Budget Net Profit
Beginning of the Year Net Assets

ACTUAL ROI

= Net Profit

Beginning of the Year Net Assets

* ROI calculated per division and used as a BONUS BASED
ABRAMS STRUCTURE

Main Issue

Overall Evaluations about Abrams

Management Control System

Problem Statement
1
1.

2.
3

3.

Many disputes over transfer price of parts sold by the

Produce Division to the AM Division
AM division treated as captive customer by other divisions
Excessive inventories of Abrams AM and Product Division

Analysis of Solution Alternatives (1)

Analysis: Many disputes over transfer price of parts sold by the Product Division to
the AM Division
Actual Condition

Every division want to make profit and focus

only on their profit
Product Division prefer to sell their product to
OEM because they can get more incentive /
bonus

Analysis

The Management must be make Transfer

Pricing between department due to they dont
have any internal price (ex...%)
That isnt fair that Product Division cant make
any incentive from their sales to AM.
1. What is the Product Division reward if they
make any efficiency?
2. What is the impulse for Product Division to
make efficeiency (if the PD product is
different with AM Product)?
The Actual result for AM Division = 80% Gross
Margin $100mio/$180mio unfair if Product
Division dont have any incentive.
The Beginning of the Year Net Assets as based
of insentive calculation must be separated
clearly between Division so the calculation of
incentive will be more fair.

Analysis of Solution Alternatives (1)

Analysis: AM Division treated as captive customer by other division
Actual Condition

Ignition, Transmission and Engine parts

division can sell to OEM and AM, but AM only
can sell to OEM and Cant sell other products
except from the Company

The insentive program makes Ignition,

Transmission and Engine parts division prefer
to sell their product to OEM

Analysis

The Company must change their policy.

If the want all of the Division become Profitable
Profit Center they must liberate AM to be more
creative to look for new customer and new
market so AM could be MORE USEFUL for the
Company and get more insentif.

If the Product Division couldnt make a new

product that required by AM Division or if the
product is more cheap if made outside so they
could outsource it.
So they will not burden production capacity,
and earn beyod production capacity and no
spend money for investment.

The management must have internal sales

target quantity from Product Division to AM

Analysis of Solution Alternatives (1)

Analysis: Excessive Inventories of Abrams AM and Product Division
Actual Condition

Many inventory stack every month, the

production management is wrong

Analysis

The Product & AM Division must made a

production report, so they could responsible
with their production.

Usually Manufacturing Company got the PO

each month. If they produce too excessive,
means their production control isnt good and
must be reviewed.

Recommendation
1

Considering AM is New Division, it will not fair if they take a existing customer
from OEM Division. AM Division will have insentif only the new customer that
they could get and OEM division could make a new product and customer, so
between division will be more competitive to get new customer.

They will need Transfer Pricing from OEM division to AM and bonus / insentive
for the OEM division, due to unfair if they dont have any insentif from the
product that they produce and considering that factory production capacity is
limited.

AM Division Could Sell Other Product that not related with OEM Production
(not same product or competitor products).
And If they could get more cheaper price besides OEM Division, they could
outsource it. (it means the OEM division isnt efficient)
Therefore the Company will increase their CF without new investment.