CASE STUDY

Vershire Company
In 1996 Vershire Company was a diversified packaging company with several major divisions, including
the Aluminum Cam division - one of the largest manufacturers of aluminum beverage cans in the United
States. Exhibit 1 shows the organization chart for the Aluminum Can division. Reporting to the divisional
general manager were two line managers, vice presidents in charges of manufacturing and marketing.
These vice presidents headed all of the division’s activities in their respective functional areas.

The Aluminum Can division’s growth in sales slightly outpaced sales growth in the industry at large. The
division had plants scattered throughout the United States. Each plant served customers in its own
geographic region, often producing several different sizes of cans for a range of customers that included
both large and small breweries and soft drink bottlers. Most of these customers had between two and four
suppliers and spread purchases among them. If the division failed to meet the customer’s cost and quality
specifications or its standards for delivery and customer service, the customer would turn to another
supplier. All aluminum can producers employed essentially the same technology, and the division’s
product quality was equal to that of its competitors.

Industry Background1
Traditionally, containers were made from one of several materials: aluminum, steel, glass, fiber-foil
(paper and metal composite), or plastic. The metal container industry consisted of the hundred-plus firms
that produced aluminum and tin-plated steel cans. Aluminum cans were used for packaging beverages
(beer and soft drinks), while tin-plated steel cans were used primarily for food packaging, paints, and
aerosols. In 1970, steel cans accounted for 88 percent of the metal can production, but by the 1990s
aluminumhad come to dominate the industry. In 1996, aluminum cans accounted for over 75 percent of
metal can production. The soft drink bottlers who purchased the containers were primarily small
independent franchisees of Coca-Cola and Pepsi Cola, which represented their independent bottlers in
negotiating terms with the container companies.

Five beverage container manufacturers accounted for 88 per cent of the market. The minimum efficient
scale for a container plant was five lines and it cost $20 million in equipment per line. Raw materials
typically accounted for 64 percent of the production cost. Other costs included labour (15 percent),
marketing and general administration (9 percent), transportation (8 percent), depreciation (2 percent), and
research and development (2 percent).

For beverage processors, the cost of the can usually exceeded the cost of the contents, with the container
accounting for approximately 40 per cent of the total manufacturing cost. Most beverage processors
maintained two or more suppliers; and some processors integrated backward, manufacturing cans
themselves. One large beverage company produced one-third of its own container requirements and
ranked as one of the top five beverage container producers in the industry.

Prior to the early 1970s, cans were produced by rolling a sheet of steel, soldering and cutting it to size,
and attaching both the top and the bottom. In 1972 the industry was revolutionized when aluminum

This case was adapted by Anil R. Chitkara (T’94) under the supervision of Professors Vijay Govindrajan and Robert N. Anthony. The case is
based (with permission) on an earlier case prepared by Professor David Hawkins, Harvard Business School.

The industry background is based on a similar description in the Crown Cork and Seal Company case, prepared by Prof. Hamermesh, Harvard
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Business School.

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producers perfected a two-piece process in which a flat sheet of metal was pushed into a deep cup and a
top was attached. By 1996 the manufacturing process had become even more efficient, producing over
2,000 cans per minute.

In addition to production efficiency, aluminum had other advantages over steel: It was easier to shape; it
reduced the problems of flavoring; it permitted more attracted packaging because it was easier to
lithograph; and it reduced transportation costs because of its lighter weight. Additionally, aluminum was
more attractive recycling material, with a ton of scrap aluminum having almost three times the value of a
ton of scrap steel. Four global companies supplied aluminum to can producers: Alcoa, Alcan, Reynolds,
and Kaiser. Three of these companies (Alcan, Alcoa, and Reynolds), also manufactured aluminum
containers.

EXHIBIT 1 Aluminum Can Division

Division General
Manager

Manufacturing Marketing Manager

Manager

Plant Manager 1 District 1

Plant Manager 2 District 2

Plant Manager 7 District 15

Budgetary Control System

Divisions of Vershire Company were structured to encompass broad product categories. Divisional
general managers were given full control of their businesses with two exceptions: the raising of capital
and labor relations, which were both centralized at head office. The budget was used as the primary tool
to direct each division’s efforts towards common corporate objectives.

Sales Budget
In May, each divisional general manager submitted a preliminary report to corporate management
summarizing the outlook for sales, income and capital requirements for the next budget year, and
evaluating the trends anticipated in each category over the subsequent two years. These reports were not
detailed and were usually fairly easy to pull together since each division was already required to predict
market conditions in the current year and to anticipate capital expenditures five years out as a part of the
strategic planning process.

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Once the divisional general managers had submitted these preliminary reports, the central market research
staff at corporate headquarters began to develop a more formal market assessment, examining the
forthcoming budget year in detail and the following two years in more general terms. A sales forecast was
then prepared for each division; and these forecasts were combined to create a forecast for the entire
company.

In developing division forecasts, the research staff considered several topics, including general economic
conditions and their impact on customers, and market share for different products by geographic area.
Fundamental assumptions were made as to price, new products, changes in particular accounts, new
plants, inventory carryovers, forward buying, packaging trends, industry growth trends, weather
conditions, and alternative packaging. Each product line, regardless of sixe, was reviewed in the same
manner.

These forecasts were prepared at the head office in order to ensure that basic consumptions were uniform
and that overall corporate sales forecasts were both reasonable and achievable. The completed forecasts
were forwarded to their respective divisions for review, criticism, and fine-tuning.

The divisional general managers then compiled their own sales forecasts from the bottom up, asking each
district sales manager to estimate sales for the coming budget year. The district managers could request
help from the head office or the divisional staff but in the end assumed full responsibility for the forecasts
they submitted.

All district sales forecasts were consolidated at the division level for review by the vice president for
marketing, but no changes were made in a district’s forecast unless the district manager agreed. Likewise,
once the budget had been approved, any changes had to be approved by all those responsible for that
budget.

This process was then repeated at the corporate level. When all the responsible parties were satisfied with
the sales budget, the figures became fixed objectives, with each district being held responsible for its own
portion. The entire review and approval process had four objectives:

1. To assess each division’s competitive position and formulate courses of action to improve upon it.
2. To evaluate actions taken to increase market share or to respond to competitors’ activities.
3. To consider undertaking capital expenditures or plant alterations to improve existing products or
introduce new products.
4. To develop plans to improve cost efficiency, product quality, delivery methods, and service.

Manufacturing Budget
After final approval at the divisional and corporate levels, the overall sales budget was translated into a
sales budget for each plant, broken down according to the plants from which the finished goods would be
shipped. At the plant level, the sales budget was then categorized according to price, volume, and use.

Once the sales numbers were estimated, each plant budgeted gross profit, fixed expenses and pretax
income. Profit was calculated as the sales budget less budgeted variable costs (including direct material,
direct labour, and variable manufacturing overhead-each valued at a standard rate) and the fixed overhead
budget. The plant manager was held responsible for this budgeted profit number even if actual sales fell
below the projected level.

Cost standards and cost reduction targets were developed by the plant’s industrial engineering department,
which also determined budget performance standards for each department, operation, and cost center
within the plant-including such items as budgeted cost reductions, allowances for unfavorable variances
from standards, and fixed costs such as maintenance labor.
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Before plant budgets were submitted, controller staff from the head office visited each plant. These visits
were extremely important because they provided an opportunity for plant managers to explain their
situation and allowed controllers to familiarize themselves with the reasoning behind the managers’
numbers so that they could better explain them when they were presented to corporate management. The
controllers also used these visits to provide guidance as to whether the budgeted profits were in line with
corporate goals, and to reinforce the notion that headquarters was in touch with the plant.

Each visit usually lasted about half a day. Most of the time was devoted to reviewing the budget with the
plant manager and any supervisors the managers wished to include in the meetings; but time was also
allocated for a plant walk-through so controllers could see for themselves how (and what) the employees
were doing.

On or before September 1, plant budgets were submitted to the division head office, where they were
consolidated and presented to the divisional general manages, for review. If the budgets were not quite in
line with the management’s expectations, plant managers were asked to look for additional savings. When
the divisional general manager was satisfied with the budget, the budget was sent to the Chief Executive
Officer (CEO), who either approved it or asked for certain modifications. The final consolidated budget
was submitted for approval at the Board of Directors meeting in December.

Once the budget had been approved, it was difficult to change. Any problems that arose between sales and
production at a given plant were expected to be solved by people in the field. If a customer called with a
rush order that would disrupt production, for example, production could recommend various courses of
action but it was the sales manager’s responsibility to get the product to the customer. If the sales manager
determined that it was essential to ship the product right away that would be done. The customer was
always the primary concern.

Performance Measurement and Evaluation

On the second business day after the close of each month, every plant faxed certain critical operating
variances which were combined into a “variance analysis sheet.” A compilation of all variance sheets was
distributed the following morning to interested management. Plant managers were not supposed to wait
until these monthly statements were prepared to identify unfavorable variances; rather they were expected
to be aware of them (and to take corrective action) on a daily basis.

Four business days after the close of every month, each plant submitted a report showing budgeted and
actual results. Once these reports were received, corporate management reviewed the variances for those
items where figures exceeded budgetary amounts, thus requiring plant managers to explain only the areas
in which budgeted targets had not been met. The focus was on net sales, including price and mix changes,
gross margin, and standard manufacturing costs.

The budgeted and actual information submitted is summarized in Exhibit 2. Supplemental information
was provided by supporting documents (see Exhibit 3). Both reports were consolidated for each division
and for the entire company, and distributed the next day.

The fixed costs were examined to see if the plants had carried out their various programs, if the programs
had met budgeted costs, and if the results were in line with expectations.

EXHIBIT NO.2 Performance Evaluation Report for a Plant for the Month of November.
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 Month
Items Actual $ Variance $ Year – to Date Variance $

Total Sales
Variances due to
Sales price
Sales mix
Sales volume
Total Variable Cost of Sales
Variances due to
Material
Labour
Variable overhead
Total Fixed Manufacturing Cost
Variances in fixed cost
Net Profit
Capital Employed
Return on Capital Employed

Management Incentives
The sales department had sole responsibility for the price, sales, mix, and delivery schedules. The plant
manager had responsibility for plant operations and plant profits.

Plant managers were motivated to meet their profit goals in a number of ways. First, only capable
managers were promoted, with profit performance being a main factor in determining capability. Second,
plant managers’ compensation packages were tied to achieving profit budgets. Third, each month a chart
was compiled showing manufacturing efficiency2 by plant and division. These comparative efficiency
charts were highly publicized by most plant managers despite the inherent unfairness in comparing plants
that produced different products requiring different setup times, etc. Some plants ran internal
competitions between production lines and departments to reduce certain cost items, rewarding
department heads and foremen for their accomplishments.

EXHIBIT NO.3 Supplemental Reports

Individual Plant Level Reports

Report Content
Analysis of sales by customer groups Detailed analysis of sales volume, sales dollars, profit dollars,
and profit margin by end user customers (e.g., beer companies,
soft drink companies).
Analysis of sales More detailed backup analysis to Exhibit 2 regarding

Variances due to sales price, sales mix, and sales volume

Analysis of costs More detailed backup analysis to Exhibit 2 regarding

Variances due to variable costs and fixed costs of

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 manufacturing.

Division Level Reports

Report Content
Comparative analysis of profit Comparison of sales and profits across plants

performance
Comparative analysis of manufacturing Comparison of efficiencies in variable and fixed costs across
plants.
Efficiency.

Questions:
1. Outline the strengths and weaknesses of Vershire Company’s planning and control system.
2. Trace the profit budgeting process at Vershire, starting in May and ending with the Board of
Directors’ meeting in December. Be prepared to describe the activities that took place at each step
of the process and present the rationale for each.
3. Should the plant managers be held responsible for profits? Why? Why not?
4. How do you assess the performance evaluation system contained in Exhibits 2 and 3?
5. On balance, would you re-design the management control structure at Vershire Company? If so,
how and why?

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Manufacturing efficiency = Total actual variable manufacturing costs *100
Total standard variable manufacturing costs.