Author Question: Responsibility, controllability, and stretch targets. Consider each of the following independent ... (Read 34 times)

appyboo · **on:** Jul 6, 2018

Responsibility, controllability, and stretch targets.

Consider each of the following independent situations for Happy Tours, a company owned by Jason Haslett that sells motor coach tours to schools and other groups. Happy Tours owns a fleet of 10 motor coaches and employs 12 drivers, 1 maintenance technician, 3 sales representatives, and an office manager. Happy Tours pays for all fuel and maintenance on the coaches. Drivers are paid 0.50 per mile while in transit, plus 15 per hour while idle (time spent waiting while tour groups are visiting their destinations). The maintenance technician and office manager are both full-time salaried employees. The sales representatives work on straight commission.

1. When the office manager receives calls from potential customers, she is instructed to handle the contracts herself. Recently, however, the number of contracts written up by the office manager has declined. At the same time, one of the sales representatives has experienced a significant increase in contracts. The other two representatives believe that the office manager has been colluding with the third representative to send him the prospective customers.
2. One of the motor coach drivers seems to be reaching his destinations more quickly than any of the other drivers and is reporting longer idle time.
3. Fuel costs have increased significantly in recent months. Driving the motor coaches at 60 miles per hour on the highway consumes significantly less fuel than driving them at 65 miles per hour.
4. Regular preventive maintenance of the motor coaches has been proven to improve fuel efficiency and reduce overall operating costs by averting costly repairs. During busy months, however, it is difficult for the maintenance technician to complete all of the maintenance tasks within his 40-hour workweek.
5. Jason Haslett has read about stretch targets, and he believes that a change in the compensation structure of the sales representatives may improve sales. Rather than a straight commission of 10 of sales, he is considering a system where each representative is given a monthly goal of 50 contracts. If the goal is met, the representative is paid a 12 commission. If the goal is not met, the commission falls to 8. Currently, each sales representative averages 45 contracts per month.

Required:
For situations 14, discuss which employee has responsibility for the related costs and the extent to which costs are controllable and by whom. What are the risks or costs to the company? What can be done to solve the problem or improve the situation? For situation 5, describe the potential benefits and costs of establishing stretch targets.

Question 2

Vegas Company paid on account for advertising expenses, 900 . The accountant would record the following journal entry:
a. Cash 900
Advertising Expense 900
b. Accounts Receivable 900
Cash 900
c. Accounts Payable 900
Cash 900
d. Advertising Expense 900
Cash 900

LVPMS · **Reply #1 on:** Jul 6, 2018

Answer to Question 1

1. The office manager has the responsibility to follow company guidelines and write contracts herself for customers who call her directly. Diverting potential customers to the sales representative costs the company a sales commission that would not have otherwise been paid. If satisfaction surveys are sent to customers asking about their first contact with the company, this may be enough to prevent the office manager from breaking the rules.

2. Each driver is responsible for keeping an accurate accounting of his or her time. Because the drivers are paid for mileage while driving and an hourly rate while in idle, there is an incentive to report less travel time and more idle time. The cost could be controlled by using global positioning systems (GPS) to track the movement and location of the motor coaches.

3. The drivers are responsible for driving the motor coaches at fuel-efficient speeds on the highway. The maintenance technician is responsible for maintaining the vehicles to improve efficiency. An increase in fuel consumption would be difficult to pin on either employee because either could be responsible. Further, there is no incentive for the drivers to drive slower, as they are paid by the mile. Again, global positioning systems (GPS) could be used to track the movement of the vehicles. Some kind of bonus could be offered to the technician for improvements in fuel efficiency.

4. The maintenance technician is clearly responsible for completing all of the preventative maintenance. If he cannot complete the tasks during busy months, the company should consider outsourcing some of the more routine maintenance jobs. Requiring the technician to work significant overtime will likely decrease his efficiency. Ignoring routine maintenance will end up costing the company more money in fuel and repair costs.

5. Haslett has designed the stretch target system correctly. Taking advantage of loss aversion, Haslett has set a stretch target of 50 contracts rewarding the representative with a 12 percent commission (assuming paying this amount of commission is profitable). If the target is not met, the commission decreases to 8 percent. This will motivate the representatives to achieve 50 contracts.
In establishing stretch targets, Haslett should be sure that there are sufficient potential contracts to allow all three sales representatives to achieve the higher target. Otherwise, the stretch target may cause friction among the representatives. One or more of representatives may decide that the 8 percent commission is not sufficient incentive to stay with the company, and may leave to work for a competitor, resulting in overall reduced sales.

Answer to Question 2

c