WESTERN LIFE CASE

Western Life teaching note

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 Questions
 From the CEO’s perspective, what are the arguments
supporting the poor evaluation of the GE’s
manager’s performance
 From the GE’s manager’s perspective, how should
he be measured?

 Hints:

Which kind of responsibility is GE?

There are possible discussions not only about indicators but
also about the value reference against which the manager
should be measured

Western Life teaching note

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 From the CEO’s perspective
 Reporting indicator:
=>GE is a profit center and should therefore be
measured with pre-tax profit (205)
 Reference value:
=> Internal benchmark (205<1304 (Cocoon’s profit);
205<1761 (WS’s profit))

Western Life teaching note

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 From GE’s manager perspective
Two main challenges to the CEO’s perspective:
 Controlability
 Comparability

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 Controlability: What does the GE’s manager
control?
 Sales: No control (a small portion (related to the quality of
service) but most of the sales are related to HQ decisions
 Raw mat.: Kgs of RM, not value
 Extl cts: controlled
 Payroll cts: working hours, not wages
 Taxes: No control

 Corp. Csts:No control

Þ A profit center but extremely difficult to isolate his impact on sales

Þ => Simplicity principle would push towards considering GE as a cost
center (Indicators: Raw materials (kg), external costs (€) and payroll
(h) costs)

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 Comparability: which reference?
 Internal benchmark: not relevant here (too many
differences in business models and assets or size)
 External benchmark: could work if competitors are
very similar and if data is available
 Historical benchmark: relevant if there is no
atrategical move from one year to another

=> Controllers obviously recommend comparing

performance to an objective or standard (that could
have been set through benchmarking)

Western Life teaching note

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 Transfer pricing
 Raw material is transfered at actual full cost + mark
up (x1,02)
 Butchers’ margin is therefore equal to 1,02 x Full
cost – Full cost = 0,02 x Full Cost. The higher the full
cost, the higher the margin!
 Strategic incongruency since butchers (purchasers)
have no incentives to decrease purchasing price)
 Suggestion: use market price since the key factor of
success is low costs/low price for meat. Here 10 €/kg
 GE’s raw material: 187,9t. X 10 = 1879€

Western Life teaching note

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 Grill Express: budget vs actual

Budget Actual Variance

Sales 6 552 6 552 0

Materials - 1 900 -1 879 21

External expenses - 860 - 860 0

Salaries - 2 227 - 2 227 0

Local taxes - 460 - 460 0

Pre-tax profit 1 105 1 126 21

• Perfect performance on external expenses and salaries

• 1% (!!!!) of unfavorable variance on materials: Very good performance!

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Western Life teaching note
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