Allentown Company Has Been Busy Over the First Few Years

question 59

Essay

Allentown Company has been busy over the first few years of its existence in penetrating its market and gaining a respectable market share. To facilitate this, Mr. Marks, the CEO, and his controller, Mr. Nance, have been developing the annual master budgets. To date, this approach has worked well.
Allentown has been acquired by a company in a related business but will continue to operate as an independent subsidiary. The CFO of the acquiring company, Mr. Radisson, has suggested to Mr. Marks that, since it was expected that his company would continue to grow, it adopt a departmental budgeting system; a suggestion Mr. Marks agreed to readily. Mr. Radisson explained to Marks' departmental managers the concepts of a departmental participative budgeting system and their involvement. The managers were encouraged to take the information and come back with suggestions which could then be put into a formal budget process.
Required:
a. What benefits will accrue to Mr. Marks under this new budgeting system?
b. What behavioral issues might arise for departmental managers and for production workers?
c. What is the most probable long-term reaction of Marks' people to the participative budget system?

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Definitions:

Current Yield

The annual income (interest or dividends) divided by the current price of the security, often used in context with bonds.

Coupon Rate

The interest rate paid yearly on a bond, represented as a percentage of its par value.

Zero Coupon

A bond or debt security that does not pay interest (a coupon) but is traded at a deep discount, providing profit at maturity when the bond is redeemed for its full face value.

Yield

The income return on an investment, such as the interest or dividends received, expressed as an annual percentage of the investment cost.