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National Motor Company
National Motor Company (NMC) is an automobile manufacturer that sells cars predominantly in the North American market. Times have been tough for the auto industry and NMC is no different. The company is under tremendous pressure to turn a profit. Several years ago, as analysts were predicting a large downturn in the auto industry, NMC decided to purchase a smaller niche automaker in the hopes of capturing a different segment of the consumer market and to better learn the manufacturing processes of other automakers.
NMC still operates as two separate divisions, Classic and New Wave, with each division manager employing a different manufacturing philosophy. The Classic manager is concerned with low input costs and quantity in production in addition to brand recognition and automobile power. The New Wave manager is concerned with quality and innovation in manufacturing in addition to fuel efficient and environmentally friendly automobiles.
NMC continued to suffer losses even with the addition of the New Wave division. While Classic appears to have good margins its sales levels are dwindling despite a large marketing campaign. New Wave has had good sales levels but there is concern that its quality and innovation focus is not cost-effective. Upper management wants to adopt one manufacturing philosophy for the entire company and has hired you as an outside consultant to provide guidance on their performance evaluation of the two managers.
Discussions with the controller revealed the following:
Required
Prepare a memo to NMC upper management that outlines weaknesses in their current cost allocation process and ways to improve it that will assist them in evaluating the performance of the Classic and New Wave divisions. Be sure to discuss manager incentives for manipulating allocation methods to influence performance measures.
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