WARAS MEDICAL INSTRUMENT, based just outside of Jakarta manufactured specialty medical instruments and sold them in market niches that were becoming increasingly competitive and price sensitive because of pressures to reduce healthcare costs WARAS MEDICAL INSTRUMENTS (WMI) was organized into nine divisions each run by a general manager. Over the years, WMI had grown both organically and by acquisition. Six of the divisions had been acquired by WMI within the past decade.

All WMI's divisions sold medical products to hospitals, laboratories and/ or doctors, so the need for product quality and reliability was high. The divisions varied significantly, however, in terms of the degree to which their success, depend on, for example, development of new products, efficiency of production and / or customer service.

Bonuses for division general managers were paid semi-annually. Up to the year 2009, these bonuses were calculated as 1 % of division operating profits.

WMI's managing director, Andi Mulawarman, had concerns, though that the operating profit measure was too narrowly. He had been reading articles about performance measurement and decided to implement a "more balanced" Scorecard. In November 2009, just before introducing a new bonus plan. Mr. Gunawan explained to his Chief Financial Officer that he was willing to pay out higher bonuses than had been paid historically if improved performance warranted doing so.

The plan provided a base bonus for division general managers of 1% of division operating profits for the half year period. This base bonus was adjusted as follows:

Increased by $ 5.000 if over 99 % of deliveries were on time, by $ 2.000 if 95 - 99 % of deliveries were on time or by zero if less than 95 % of deliveries were on time.

Increased by $ 5.000 if sales returns were less than or equal to 1% of sales, or decreased by 50 % of the excess of sales returns over 1 % of sales.

Increased by $ 1.000 for every patent application filed with the Industrial Office Minister.

Reduced by the excess of scrap and rework costs over 1% of operating profits.

Reduced by $ 5.000 if average customer satisfaction ratings were below 90%.

Operating Results for the Surgical Instruments and Ultrasound Diagnostic Equipment Divisions 2010 ($ in 0000)

Exhibit 1. Surgical Instruments Div. Ultrasound Diagnostic Div

1st half of 2nd half of 1st half of 2nd half of

2010 2010 2010 2010

Sales $ 42.0000 $ 44.000 $ 28.000 $ 29.000

Operating Profit $ 4.620 $ 4.400 $ 3.240 $4.060

On-time deliveries 95,4% 97,3% 98,2% 94,6%

Sales returns $ 450 $ 420 $ 291 $ 289

Patent applications filed 0 1 4 8

Scrap & Rework costs $ 51.1 $ 45.0 $ 39.7 $ 28.2

Customer satisfaction

(average) 78% 89% 81% 91%

If the bonus calculation resulted in a negative amount for a particular period, the manager received no bonus. Negative amounts were not carried forward in the next period.

Exhibit 1 shows results for two representative WMI divisions for the year 2010, the first year under the new bonus plan. The Surgical Instruments Division (SID), one of WMI's original businesses, sold a variety of surgical instruments, including scissors, scalpels, retractors, and clamps. The market for these products were mature, so growth was relatively slow. Not much innovation was needed but controlling cocts was critical. The Ultrasound Diagnostic Equipment Division (Ultrasound), which was acquired in 2007, sold and serviced ultrasound probes, transducers, and diagnostic imaging systems. The ultrasound market promised excellent growth and profits if the division could keep its sophisticated products on the cutting edge technologically and control both product development and production costs effectively.

In 2009 the total annual bonuses for the year earned by the managers of SID and Ultrasound were approximately $ 85.000 and $ 74.000 respectively.

Questions:

1.If you are Consultant Management Control Systems, what your opinion about the New Plan provided a base bonus for division general manager for 2010 (answer must be by calculation) (10%)

2.What your opinion believed that the new plan base bonus for division general was fair? (5%)

3.How do you think the payment process of incentive in this case? (5%)

4.What are the benefits of Management Control related to incentive? (10%)