A large corporation has a manufacturing division with 40 parts departments and 20 assembly departments.
The parts departments manufacture most of the parts for the products, and the assembly departments assemble the parts (some of which are purchased outside the firm) into final products.

About 70 percent of the manufacturing operation occurs in one geographic location, and the remainder is in plants around the world. Several hundred different final products, some in very large unit volumes, are produced, involving thousands of different parts. The final products range from inexpensive consumer goods (selling price $50) to very expensive business products (selling price $500,000).
The marketing division forecasts sales six months in advance. These forecasts then become manufacturing’s production quotas. As soon as manufacturing produces the product, it is turned over to marketing for either shipment or storage.
Manufacturing’s production quotas are “exploded” into parts requirements and the parts departments begin producing parts for use by assembly. In order for assembly to meet its production quota on final products, every part in the product must be on hand for assembly. Not having a spring costing $0.0001 is just as costly to the assembly department as not having a motor costing $500; both shut down the assembly line.
If a part is not available, the assembly department tries to assemble another product, often by coercing a parts department to alter its schedule to produce parts for the alternative product assembly.
Assembly and parts departments are evaluated as cost centers. Parts departments are evaluated on being able to produce parts cheaper than last year while meeting quality standards. They must also meet their production quotas and schedules. Parts departments that continually force assembly lines to shut down because of parts shortages impose significant costs on assembly lines. Assembly departments are evaluated based on (1) their labor costs to assemble products versus budgeted labor costs and (2) their production quotas.
In order to minimize average costs, parts departments try to manufacture all the units of a particular part required for a six-month period at once. The major discretionary fixed cost per part is setup time. That is, when the machine is being converted from producing one part to another, no output is produced. Setup time is often half a day. Therefore, to reduce average unit costs, parts are produced in large lot sizes. As soon as parts are produced, they are sent to the assembly departments.
Parts departments carry no inventories of final parts, only raw materials.
There is no transfer price for parts. There is no need for a transfer price because assembly and parts departments are evaluated as cost centers. One senior manager feels that considerable squabbling over transfer prices could be avoided by focusing on departmental costs that are under the control of the department managers. A modification is being proposed that would charge each department a holding cost for inventory on hand (12 percent cost of inventory). That is, each assembly department currently charged for its direct labor, overhead, and factory burden will also be charged 12 percent of all parts inventories. Assembly managers think this is unfair because they have no control over when and how many parts the parts departments produce. Assembly departments would like to get all the parts for one month’s assembly instead of having to hold a six-month inventory of parts.
The parts department managers argue that the inventory holding cost charged to assembly departments is fair because assembly departments are always screaming for more inventory as safety stocks to their assembly lines, and this inventory holding charge will force assembly departments to bear the costs they are imposing on the firm by demanding large inventories. Parts department managers argue that it is inefficient to produce in one-month lot sizes.
Required:
Critically evaluate the existing management control system. Describe the strengths and weaknesses of the current and proposed systems. What dysfunctional behaviors exist in the current and proposed systems?