Reference no: EM132517951

Point 1: Helen Bedru is the assistant controller of Cotton Cravat Co., a subsidiary of HG automotive, which manufactures tailpipes, mufflers, and catalytic converters at several plants throughout Ethiopia. Because of pressure for lower selling prices, Cotton Cravat Co. has had disappointing financial performance in recent years. Indeed, Helen is aware of rumblings from corporate headquarters threatening to close the plant.

Point 2: One of Helen's responsibilities is to present the plant's financial plans for the coming year to the corporate officers and board of directors. In preparing for the presentation, Helen was intrigued to note that the focal point of the budget presentation was a profit-volume graph projecting an increase in profits and a reduction in the break-even point.

Point 3: Curious as to how the improvement would be accomplished, Helen ultimately spoke with Kiruvel Mesfin, the plant manager. Kiruvel indicated that a planned increase in productivity would reduce variable costs and increase the contribution margin ratio.

Point 4: When asked how the productivity increase would be accomplished, Kiruvel made a vague reference to increasing the speed of the assembly line. Helen commented that speeding up the assembly line could lead to labor problems because the speed of the line was set by union contract. Kiruvel responded that he was afraid that if the speedup were opened to negotiation, the union would make a big "stink" that could result in the plant being closed. He indicated that the speedup was the "only way to save the plant, our jobs, and the jobs of all plant employees." Besides, he did not believe employees would notice a 2 or 3 percent increase in speed. Kiruvel concluded the meeting observing, "You need to emphasize the results we will accomplish next year, not the details of how we will accomplish those results. Top management does not want to be bored with details. If we accomplish what we propose in the budget, we will be in for a big bonus."

Required:

Question 1: What advice do you have for Helen Bedru? Support your response with sufficient and sound reasoning.