Nauman Equipment Company (NEC), which is located in Lahore, Pakistan, manufactures textile equipment. The company's primary product, a yarn comber, is among the best produced in South Asia. The company operates in a very price-competitive industry, so it has little control over the price of its products. To be competitive, the firm has to keep production costs in check by operating as efficiently as possible. Nauman Mir, the company's Chief Executive Officer, has stated that to be successful, the company must provide a very high-quality product and meet its delivery commitments to customers on time. Nauman Equipment Company is organized as shown in the following diagram.

The GM for manufacturing looks after the production and coordination between 10 different manufacturing plants spread throughout the country. The company has grown considerably over the last few decades. It was started as a single factory in 1988 and latest plant was added in 2019. The 10 plants are managed by plant managers and their performance is evaluated and bonuses distributed based on ROI of their respective plants. The plant managers are relatively free to design and implement new investments and programs within their allocated budgets. However, the plants do not have marketing or sales functions. These functions are aggregated in a separate division under GM of Sales. The company divides the territory of Pakistan in four sales areas and export efforts are organized as a 'sales area' as well. The GM of sales and area sales managers are evaluated based on margin (revenue - direct cost) from the sales areas. There is currently a disagreement between the company's two GMs regarding the responsibility-accounting system. The GM for manufacturing, Hassan Gulzar, claims that the 10 plants should be cost centers. He recently expressed the following frustration: "The plants should be cost centers because the plant managers do not control the sales of our products. Designating the plants as profit or investment centers would result in holding the plant managers responsible for something they can't control." A contrary view is held by the GM for marketing, Maria Safdar. She recently made the following remarks: "Why make us profit centers? We can't control most of the costs that are incurred at the plants!"

Required:

As the company's new controller, you have been asked to make a recommendation to Nauman Mir, the company's CEO, regarding the responsibility center issue. In your memo address the following points.

A. Which responsibility-accounting arrangement for Plants and Sales Districts would you recommend? Why?

B. Suppose that Nauman Equipment Company often experiences rush orders from its customers. Which proposed responsibility-accounting arrangements is best suited to making good decisions about accepting or rejecting rush orders? Specifically, should the plants be cost centers or profit centers?