Montgomery Fashions produces and sells clothing through various retailers. Montgomery is highly decentralized and allows its managers discretion in managing with little direct oversight. This latitude in decision making is checked by using a performance measurement and compensation system that rewards results. The vice president of production (VPP) is responsible for the production of the clothing, including the sourcing of fabrics and textiles, hiring labor, and scheduling production. The vice president of marketing (VPM) is responsible for sales and marketing, including developing new customer relations, distribution, and advertising. The VPP is measured on the cost of production relative to a budget. The budgeted cost is adjusted for the product mix and product quantity. The VPM is evaluated on actual “marketing margin” relative to a target marketing margin set at the beginning of the period. The marketing margin is calculated as the gross margin (sales minus cost of goods) less the cost of the marketing department. The advertising costs are included in the costs of the marketing department. If a manager meets or beats the target, the manager receives a bonus equal to 80 percent of salary. Failure to achieve the targeted performance results in no bonus.

Information on performance last year follows: 

Required

a. Assess the performance of the vice presidents of marketing and production.

b. What recommendations would you make concerning the management control system at Montgomery Fashions, with respect to the two vice-president positions.

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Cost of Production Target costs...... $21,000,000 Actual costs 20,487,500 Marketing Margin Target margin..... Actual margin.... $43,000,000 41,220,100