You have been assigned to perform an operational audit of the Palmer Division. The division management had recently been told to implement a management by objectives (MBO) system and to increase profits by 15 percent. However, profits have actually declined, and you have been assigned to determine the reasons. While interviewing various division managers, you were told the following:

Sales MANAger: I realized that to reach the objective, we would need a sizable increase in sales. To achieve this increase, I instituted quantity discounts on several products, and sales of these products have increased dramatically. I don't understand why we have a problem Production Manager: We have been able to increase production to keep up with the increased sales. In addition, we have been able to make on-time deliveries for all orders by enlarging the second shift crew and having some key employees work additional hours. Production has kept pace; we're not the problem.

Division Controller: Unfortunately, the products selected for the discounts already had relatively low contribution margins. With the addition of increased production costs caused by overtime payments and shift premiums, these products are scarcely at the breakeven point. To make matters worse, the attention given to these discounted products diverted promotion efforts away from products with higher contribution margins.

What recommendations will you make to improve performance?