Allentown Company Has Been Busy Over the First Few Years

question 102

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:
(1)What benefits will accrue to Mr.Marks under this new budgeting system?
(2)What behavioral issues might arise for departmental managers and for production workers?
(3)What is the most probable long-term reaction of Marks' people to the participative budget system?

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Definitions:

Factor Demand

Refers to the demand for resources or inputs that are used in the production of goods or services.

Long-Run Cost Function

The relationship between output quantities and total cost when all inputs, including capital, are variable in the production process.

Output Supply

The quantity of a good or service that producers are willing to sell at various prices over a certain period of time.

Price

The amount of money required to purchase a good or service, often determined by supply and demand dynamics in a marketplace.