Harwood Medical Instruments Case Study Analysis Order Instructions: This case asks you to evaluate an new bonus plan that was designed to specifically address the perceived shortcomings of a previous plan. In particular you should consider:
•The purpose of changing the system
•The calculated bonuses for the managers
•How well the new plan is working
Harwood Medical Instruments Case Study Analysis Sample Answer
Case Study Analysis Background
The case study of Harwood Medical Instruments provides a description of a company whose management has a serious concern on the inclusion of the operating profit measure in the bonus plan/system of the company as been too narrowly focused. This was subsequently followed by the implementation of a new bonus plan/system that led to a reduction of the weighting of significance given to the operating profit in addition to the inclusion of more measures, including sales returns, on-time deliveries, scrap and rework costs, patent applications as well as customer satisfaction. Presumably, there was a consideration of these factors as factors that critically influence success.
Question 1 Answer
The purpose of making the change mainly because there was believe among the managers that the operating income inclusion in the bonus calculation was not a good representative as a short-term measure of financial performance.
Question 2 Answers
The calculation of the bonuses that were awarded to the managers in each division including the base bonus, sales return bonus as well as scrap/rework bonus for each six-month period is shown in the tables presented below.
Question 3 Answers
Evidence exists to show that some of the desired effects have been produced by the new bonus plan/system. In both divisions i.e. surgical instruments division and ultrasound diagnostic equipment division, as the division managers have become accustomed to the new bonus system/plan, there is a decline in sales returns, increase in patent applications, a decline in the level of scrap and rework as well as an increase in customer satisfaction levels. Furthermore, there has also been an increase in on-time deliveries in the surgical instruments division; however, this increase in on-time deliveries was not present in the division of ultrasound diagnostic equipment. As a result, this evidence of desire effects led to a significant increase in the bonuses to be paid in the second half of that financial year.
In evaluating this new bonus system/plan, it is imperative to consider if the improvement that resulted from its implementation was really good. By doing so, it will be possible to evaluate the new bonus system/plan in order to determine if the improvement is good particularly if the added performance factors and/or measures to the plan can considered to be critical factors that truly determine success (Anthony & Govindarajan, 2007). However, the small incremental bonuses that the managers got paid would without any doubts seem to be money that was spent well for the overall benefit of the company. Thus, the money given to the managers in form of bonuses in this new system should be considered very essential to the division managers, hence, leading to improvement in motivation levels, yet not incurring significant expenses levels for the company. Moreover, since the outcomes of including these factors into the bonus plan or system seem quite different between the two divisions, it is then quite important to consider if the same factors need to be applied to the two divisions as well as in the same weightings of significance (Chenhall, 2003; Otley, 2004).
In order to determine whether there are any changes that would be suggested to the new bonus plan, each of the performance factors or measures ought to be subjected to a detailed and critical scrutiny to succinctly know its benefits and undoing for the new bonus plan. For example, patents are not actually important for the surgical instruments division that usually sells such mundane products as clamps, scissors, surgical blades and bowls, among other products. This is attributable to the fact that, the inclusion of patents applications in the surgical instrument division may just encourage patents applications that even if are approved do not result to any significant economic benefit both to the division as well as the company as a whole (Chenhall, 2003). However, in the ultrasound diagnostic equipment division which is high-technology dependent and has high potential for development of new diagnostic technologies, patents applications should be encouraged because approval of a single patent application may contribute to significant economic benefit both to the division as well as the company as a whole. This economic benefit may not only financial but also increased customer satisfaction as well as high quality products (Horngren, Sundem & Stratton, 2005). Furthermore, there should be a change on the specific performance constraints on customer satisfaction and on-time deliveries which for the bonus to be awarded are set at an average of 90% and 95% for customer satisfaction and on-time deliveries respectively. On the two performance factors or measures, the bonus plan or system should be changed from awarding bonuses on basis of arbitrary performance constraints functions into a linear bonus awarding function (Chenhall, 2003; Otley, 2004). This is attributed by the fact that, through adoption of a linear function in awarding bonuses there will no constraints or cutoff target meaning the divisions will strive to achieve the highest level they could since the bonuses payoff will be directly proportional to the levels achieved in these performance factors (Anthony & Young, 2009; Vera & Kuntz, 2014).
Harwood Medical Instruments Case Study Analysis References
Anthony, R. & Govindarajan, V. (2007). Management Control Systems. Boston, MA: McGraw-Hill.
Anthony, R. & Young, D. (2009). Management control in nonprofit organizations. Boston, MA: McGraw-Hill.
Chenhall, R. (2003). Management control system design within its organizational context: Findings from contingency-based research and directions for the future. Accounting, Organizations and Society, 28(2-3), 127-168.
Horngren, C., Sundem, G., & Stratton, W. (2005). Introduction to Management Accounting. Hoboken, NJ: Pearson.
Otley, D. (2004). Management control in contemporary organizations: towards a wider framework. Management Accounting Research, 5(2), 289-299.
Vera, A. & Kuntz, L. (2014). Finance-oriented vs. operations-oriented management control in public hospitals. Journal of Hospital Administration, 3(6), 190-204.
