This is case 4-2. Accounting for Decision Making and Control 10th edition.
vel are expended on the job approach makes sense because it links the Required: This case presents some popular approaches to alleviating agency costs. Although certain of these methods is likely to succeed. Discuss the similarities and differences between the aspects of each of these methods are consistent with the views presented in the text, non ideas of the chapter and m Dr. Weisbrotten's approach. (11) Harold Mateen's idea of hiring "harder-working" mechanics. b. Discuss the expected general effect on agency costs at Woodhaven Service of the new incentive compensation plans. How might they help Woodhaven? Assuming that Harold iors would be expected under the new compensation proposals? How damaging would wants his business to be successful for a long time to come, what major divergent behay- you Organizational Architecture expect these new behaviors to be to a business such as Woodhaven Service? Also, present a defense of the following propositions: ( Harold's plan offers less incentive for divergent behavior than Honest Jack's. (ii) Limiting a mechanic's pay by placing an upper bound of $750 per week on his or her earnings reduces the incentive for divergent behavior. c. Suppose Harold owned a large auto repair franchise located in a department store in a popular suburban shopping mall. Suppose also that this department store is a heavily pro- moted, well-known national chain that is famous for its good values and easy credit. How should Harold's thinking on incentive compensation change? What if Harold did not own the franchise but was only the manager of a company-owned outlet? d. In this problem, it is assumed that knowledge and decision rights are linked. The mechanic who services the car decides what services are warranted. Discuss the costs and benefits of this fact for Woodhaven Service and the independently owned chain-store repair shop. e. Suppose that Woodhaven's problems are not due to agency costs. Briefly describe a likely problem that is apparent from the background description in this problem. Case 4-2: Woodhaven Service Background Woodba on sorvice is a smnxt. independent gas station located in the Woodhaven section of Queens, The station has taree gasoline pumps and two service bays. The repair facility specializes in automo- tive maintenance coil changes, tune-ups, etc.) and minor repairs (mufflers, shock absorbers, etc.), Woodhaven generally refers customers who require major work, such as transmission rebuilds and clectronics, to shops that are better equipped to handle such repairs, Major repairs are done in-house only when both the customer and mechanic agree that this is the best course of action. During the 20 years that he has owned Woodhaven Service, Harold Mateen's competence and fairness have built a loyal customer base of neighborhood residents. In fact, demand for his services has been more than he can reasonably meet, yet the repair end of his business is not especially prof- itable. Most of his competitors earn the lion's share of their profits through repairs, but Harold is making almost all of his money by selling gasoline. If he could make more money on repairs, Wood- haven would be the most successful service station in the area. Harold believes that Woodhaven's weakness in repair profitability is due to the inefficiency of his mechanics, who are paid the industry average of $500 per week. While Harold does not think he overpays them, he feels he is not getting his money's worth Harold's son, Andrew, is a student at the university, where he has learned the Socratic dictum, "To know the Good is to do the Good." Andrew provided his father with a classic text on employee Hivery me working met her. She escence T'S master DW Mandhe Amb - Man Awachantes devoted on our text. De own the more and responsibilities of the pro There were med did not surprise Lisa, H Com 1, despie Sapo Ontee Com Yes, Merhabad wearing a smiley face button, he agrowce Marollare le would just have to go our and Andrew's the warunk As anyone series about business ko y el mapement of human resources resides in Professor we wereyh Hart follow the scientific methods to och Aw' Compensation Plans Nebel Aller alle de Borbone assessful as lack without practical Hal thinks that his neighbor Jack Myers, owner of Honest Jack'stod Auto Or maybe Jade's great to jingle that does Jack tells Harold D's the pinge the way pay my wys. Your mochmakeS10 W O paid for comission and nothing more. They dood by me and I do er what Why should they put out for you? Because of those buttons? My sy Laat it's imple Pay 'em a percent of the sales for the work they do. 11 yos 5600 Balticles are better, they get that percent extra. This way they don't get hurt be a nice guy how it make that percent that if sales are average, then they make them. Otherwiselerem stave. to help you out mochies This hurt Hard He really liked those buttons. Still, Jack did have a point. Straight com sion, however, seemned a little radical. What if sales were bad for a week? That would be Harold figured that it would be better to pay each mechanic a guaranteed $300 a week would bring their ware back to 5300. Under this system, the mechanics would be insc had wel, wood not be penalized for an average week, and would still have the incentive to a comission rate that would given an average volume of business. pay them the extra Sh On the other hand, maybe Jack knows only about the used car business, not about us general Harold figured that he should look for an incentive pay method more in line with things are done in the auto repair business. Perhaps he should pay his mechanics as he is alty his custome-by the job. It is standard practice for service stations to charge customers a la is generally taken from a manual that outlines expected labor times for specific jobs on specific for the labor associated with any job. The number of labor hours for which the customer is charge vehicles. The customer pays for these expected hours regardless of how many actual labore are cepended on the job. Many shops also pay their mechanics by the job. Harold thinks this to improve sales. Yes, this seemed more fair. approach makes sense because it links the mechanic's pay to the labor charges paid by the center Requimal This case presents some popular approaches to alleviating agency costs. Although certain of these methods is likely to succeed. Discuss the similarities and differences between the ideas of the chapter and c) Dr. Weisbrotten's approach. (1) Harold Mateen's idea of hiring "harder-working" mechanics. b. Discuss the expected general effect on agency costs at Woodhaven Service of the new incentive compensation plans. How might they help Woodhaven? Assuming that Harold wants his business to be successful for a long time to come, what major divergent behav- iors would be expected under the new compensation proposals? How damaging would you
