"What in the world is going on over there?" These words were spoken by the Vice-President of the International Division of VLB Corporation. He had just finished reading the financial results for the activities of the Transylvanian subsidiary of the firm for the past year. At the three previous quarterly performance review sessions, the general manager of the Transylvanian subsidiary had written in his report that the profit target for the subsidiary would be attained by year-end. However, the reported actual results indicated that the subsidiary had barely managed to achieve two-thirds of its profit goal for the year BACKGROUND VLB is a large multi-national corporation that manufactures and sells technologically advanced control systems throughout the world. All manufacturing and sales activities outside of North America are managed by the International Division. The division is headquartered in North America, but has regional divisional offices in Europe, South America, the Far East, and Australia. In Europe, the wholly-owned subsidiaries in each country report to the European regional office. Over the years, VLB had evolved into a highly decentralized firm. The decentralization was most apparent in the responsibility structure of the firm. Each individual production plant and sales office was regarded as an independent profit center. In the case of Transylvania, there was one plant and one sales office. The production plant manufactured two products - a heater and an electronic control system. The sales office generally sold only those products manufactured in the plant and usually sold the entire production volume of the plant. Each was defined to be a separate profit centre Annually, each profit centre was required to develop a profit plan for itself. This plan would be forwarded to the head office for review and approval. Once approved, the profit centre manager was held accountable for achieving the stated profit target usually expressed as a return on sale:s (ROS). The bonus for the year was equally dependent upon the magnitude of the profits earned by the centre and achievement of the targeted goal. Thus, if the profit centre achieved its ROS goal for the year, the manager would receive a bonus. In addition, the manager could earrn another bonus equivalent to the first if the profit centre achieved an increase in profits above the planned profit level. Generally, the total bonus earned by the best of the managers could amount to as much as 30% of the manager's annual salary. For plant managers and sales managers, the annual salary ranged fro $45.000 to $60,000. In the case of subsidiary managers, the annual salary was in the range of S100,000. If one of the targets was not achieved in the period, that portion of the bonus could not be earned. It was the philosophy of the firm that once the plan was set and targets accepted by upper management, the manager was then held fully accountable and responsible for achieving the level of performance that he had stated in his plan for the period , the plant and the sales offic In the case of Transylvania These plans were expressed in the local currency called herns. For corporate reasons, it was company policy that all transfers between profit centres we transfer price policy allowed the parent company to net all transactions between international subsidiaries and only keep track of the differences in the flows between any two subsidiaries. ch prepared a profit plan for the year xpressed in U. S. dollars. This "What in the world is going on over there?" These words were spoken by the Vice-President of the International Division of VLB Corporation. He had just finished reading the financial results for the activities of the Transylvanian subsidiary of the firm for the past year. At the three previous quarterly performance review sessions, the general manager of the Transylvanian subsidiary had written in his report that the profit target for the subsidiary would be attained by year-end. However, the reported actual results indicated that the subsidiary had barely managed to achieve two-thirds of its profit goal for the year BACKGROUND VLB is a large multi-national corporation that manufactures and sells technologically advanced control systems throughout the world. All manufacturing and sales activities outside of North America are managed by the International Division. The division is headquartered in North America, but has regional divisional offices in Europe, South America, the Far East, and Australia. In Europe, the wholly-owned subsidiaries in each country report to the European regional office. Over the years, VLB had evolved into a highly decentralized firm. The decentralization was most apparent in the responsibility structure of the firm. Each individual production plant and sales office was regarded as an independent profit center. In the case of Transylvania, there was one plant and one sales office. The production plant manufactured two products - a heater and an electronic control system. The sales office generally sold only those products manufactured in the plant and usually sold the entire production volume of the plant. Each was defined to be a separate profit centre Annually, each profit centre was required to develop a profit plan for itself. This plan would be forwarded to the head office for review and approval. Once approved, the profit centre manager was held accountable for achieving the stated profit target usually expressed as a return on sale:s (ROS). The bonus for the year was equally dependent upon the magnitude of the profits earned by the centre and achievement of the targeted goal. Thus, if the profit centre achieved its ROS goal for the year, the manager would receive a bonus. In addition, the manager could earrn another bonus equivalent to the first if the profit centre achieved an increase in profits above the planned profit level. Generally, the total bonus earned by the best of the managers could amount to as much as 30% of the manager's annual salary. For plant managers and sales managers, the annual salary ranged fro $45.000 to $60,000. In the case of subsidiary managers, the annual salary was in the range of S100,000. If one of the targets was not achieved in the period, that portion of the bonus could not be earned. It was the philosophy of the firm that once the plan was set and targets accepted by upper management, the manager was then held fully accountable and responsible for achieving the level of performance that he had stated in his plan for the period , the plant and the sales offic In the case of Transylvania These plans were expressed in the local currency called herns. For corporate reasons, it was company policy that all transfers between profit centres we transfer price policy allowed the parent company to net all transactions between international subsidiaries and only keep track of the differences in the flows between any two subsidiaries. ch prepared a profit plan for the year xpressed in U. S. dollars. This