Question

Question 1 -Managing Performance : (a) When developing financial performance reports, in a decentralised organisation, a contribution margin format may be used. Explain the advantage of using this format for performance evaluation of units and managers. (b) If you were the chief executive, would you choose a centralised or decentralised structure for the following organisations. And explain why. (i) Hospital (ii) High school with two campuses

Answer 1

a) Advantages of contribution margin format for performance evaluation in a decentralised organisation

· It helps in understanding the segment results in a better way compared to traditional way of income statement

· It helps in understanding the segment results which is separate from the whole company results

· It helps in decision making like continue or discontinue of segments based on contribution margin and avoidable fixed cost

· It helps in evaluation of various alternatives at segment level for example : impact of advertising on sales, evaluation of new selling prices, etc

· It helps in fixing accountability and responsibility for the performance of the units to the mangers and their team

· It helps in evaluation of investments through return on investment and residual income

· It helps in performing relevant analysis like accepting special orders, profitability evaluation, break even analysis, etc

b) i) Hospital

A centralised structure would be preferred since hospital will be in a single location and all required data are needed in one main office only

ii) High school with two campuses

Decentralised structure would be preferred since there are two different campuses and need and requirements of two campuses would be different at different times.