MCS QUESTIONS & MODEL ANSWERES

1.(a)Describe the strategy and tactics of EBI as of 1990

Students need to explain what is strategy and differentiate between Corporate level Strategy
and business level strategy. EBI having presence in different countries and expanded product
line followed Business unit level strategies.
In 1990, EBI wanted to increase its market share by diversifying its activities. So it
wanted to go digital and launched of CD ROM encyclopedia. Students can explain
this point through BCG matrix (Relative market share and market growth rate). P-
63 of text book.
EBI door to door tactics - talking with individuals and families, persuading them to invest
in EBIs voluminous store house of knowledge. This made many parents believe that if
their children used this book, it will give many advantages.
Why was EBIs business model so successful for more than 200years?
EBIs strategy was to always have competitive advantage .( Students can explain
this point with the help of Porters Five Forces Model .p-67 of book).
E B I f o c u s e d o n i n n o v a t i o n , hired several notable scientist and scholars to ensure
competitive advantage. It e n t e r e d t h e d i g i t a l a g e , o f f e r e d a n e l e c t r o n i c v e r s i o n t o
business users of Lexis-Nexis, an information retrieval service of MeadData Central ,
pu b l i s h e d C o m p t o n s E n c y c l o p e d i a o n C D , e t c . T h e c o m p a n y m a i n t a i n e d t h a t
Our brand represents material you know is authoritative and trust wothy.

1(b)How vulnerable was EBIs model in the early 1990s ?

During the early 1990s, the software giant Microsoft decided to enter the
encyclopedia market. Microsoft licensed material from Funk and Wagnalls
Encyclopedia which sold its sets in supermarkets, added some public-domain content,
and released it on CD-ROM in 1993. E B I s t i l l c o n t i n u e d w i t h i t s d o o r t o d o o r
m o v e , talking with individuals and families, persuading them to invest. Students can
high light competitive advantage of Micro soft by using the model relative
differentiation-vs- relative cost given in the book
(p-69). If EBI do not change their strategy , Microsoft will take over their market as a
premiere source of knowledge.

2(a) What is Southwests strategy? What is the basis on which Southwest builds its
competitive advantage?
Answer : Southwests strategy : improve efficiency and pass cost saving to its passengers by
offering them low prices.
It focused on two main strategic areas: (a) Operating Costs, (b) People

Operating Costs : Strategy for Low cost

a) Faster than average gate turnarounds to yield higher utilization rates.

b) One class of seating.

c) No meals or movies on flight.

d) One type of airplane Boeing 737.

e) Point-to-Point flight routes.

f) High employee productivity.

g) A very successful fuel hedging program that has reduced a major fraction
of its operating expense).

h) Serves relatively less-congested airports to achieve high asset utilization

and reliable on-time performance (however later it had spread its
operations to major airports as well)

People

Herb Kelleher,(founder, Southwest) : If the employees are happy, satisfied, dedicated, and
energetic, they will take real good care of the customers.

Employee compensation : Southwest employees were among the highest paid in the industry
and the company enjoyed low employee turnover relative to the airline industry.
Culture : culture of hard work, high-energy, fun, local autonomy, and creativity

Q2(b). How do Southwests control systems help execute the firms strategy?

By focusing on Goal Congruence both formal and informal factors

Students should write the formal and informal factors that existed in Southwest airlines through
which goal congruence was ensured. Book page 115

Southwests culture : Southwests culture was hard work, high-energy, fun, local autonomy,
creativity, recognition of personal initiatives, etc. Unique recruitment process peer group
recruitment system.

Southwests Management style : Attitude of the superiors

3. (a) Discuss the impact of Internet on Management Control ( Page 12 of book)

Suggested answer:

Internet provides

a. Instant access,
b. Multi-targeted communication,
c. Costless communication,
d. Ability to display image,
e. shifting power and control

Though Internet facilitates coordination and control but cannot substitute the fundamental
process that are involved in management control.

3(b) What are the Informal control systems that influence human behavior in an organization?
(Page 99 of the book)

Suggested answers

(i) External Factors (Like work ethic)

(ii) Internal factors(Culture, Management style, the informal Organization,

perception and communication)

4 (a) Profit Centre Organization is most appropriate to ensure that the strategic objectives

are reached, explain.

Suggested answers ( text book page 187)

Due to advantages of Profit Centres like ..

1. Quality of decision making
2. The speed of operating decisions
3. Top Management/HQ relived of day-to-day decision making
4. Managers are freer to use their imagination and initiative
5. Profit consciousness
6. Profitability of companys individual components
7. Responsive to pressure to improve competitive performance
8. Provide excellent training ground for managers

(b) Describe the various types of profitability measures used to evaluate the performance
of profit centre managers.

Suggested Answer:
1. Contribution Margin
2. Direct Profit
3. Controllable profit
4. Income before taxes
5. Net Income

5(a) How do you distinguish the process of preparing budget from Strategic planning
and Forecasting?

(i) Relation to Strategic Plg (SP):

The SP is the process of deciding on the nature & size of the several programs that are to be
undertaken in implementing an organizations strategies. Both SP & Budget Preparation (BP)
involve plg., but the types of plg activities are different in the two processes. While the Budget
process focuses on a single year, the SP focuses on activities that extend over a period of
several years. SP precedes budgeting & provides framework within which the annual budget is
developed. While the SP is structured by product lines or other programs, the BP is structured
by Responsibility Centers.

(ii) Contrast with Forecasting:

A Budget differs in several respects from a forecast. A budget is a management plan with
assumption that positive steps will be taken by the budgetee. A forecast is merely a prediction of
what will most likely happen, carrying no implication that the forecaster will attempt to shape
events that forecast will be realized.

Q5(b) Explain the steps involved in Zero Based Budgeting (ZBB)

Suggested answers

Unlike the traditional (incremental) budgeting in which past sales and expenditure trends are
assumed to continue, ZBB requires each activity to be justified on the basis of cost-
benefit analysis, assumes that no present commitment exists, and that there is no balance to
be carried forward. By forcing the activities to be ranked according to priority, ZBB
provides a systematic basis for resource allocation.

Steps involved
1. Identification/Enlisting of the decision units
2. Preparation of "Decision Packages" or extent of allocation
3. Prioritization of decision packages .
4. Cost-benefit analysis
5. Allocate resources.
6. Monitor and evaluate.
6.Answer the following questions

a) What are the various control problems faced by an MNC ?

(i) Cultural difference
(ii) Transfer pricing
(iii) Exchange Rates

b) Briefly explain how Balanced Score Card is used as a performance measurement

system. Book page 463
a) Financial
b) Customer
c) Internal Business
d) Innovation and Learning

7 (a) Bhadrachalam Paper Mills

Cost Price to Mumbai Division :: Rs.800

Selling Price to Kolkatta Division (800 x 0.70) :: Rs.560

Cost Price to Kolkatta Division (560 x 0.60) :: Rs.336

Economic impact of three quotations to Bhadrachalam Paper Mills:-

Outflow of cash for 1000

boxes

1. If the work is allotted to Aggarwal Paper Company Rs.860

2. If the work is allotted to Sharma Paper Ltd. Rs.864

Less: Profit to Kolkatta Division (180 x 0.40) Rs.72

Less: Profit to Mumbai Division (Rs.60 Rs.50) Rs.10

------- Rs.82 Rs.782

3. If the work is allotted to Mumbai Division Rs.960

Less: Profit to Kolkatta Div. (560 x 0.40) Rs.224
 Less: Profit to Mumbai Div. (960 800) Rs.160
-------- Rs.384 Rs.576

As the cost to Bhadrachalam Paper Mill is least i.e. Rs. 576, the work can be alloted to their own
division (Mumbai) at the least quotation price i.e. Rs. 860.

If the order is alloted to Mumbai Division at Rs. 860, the profit to Bhadrachalam Paper Mill as
whole is Rs. 284 (860 576) and the profit to Mumbai Division is Rs. 60 (860-800).

7.(b) Does this problem call for some changes in the transfer pricing policy of the overall
firm? If so what specific changes do you suggest?

The transfer price system looks to be dysfunctional because it focuses too much on individual
units making profit as main focus of the unit. It should focus on success and profit of the
company and not individual units.

Changes suggested : The company should restructure and have a centralized approach to
ensure overall profit goal for the organization and at the same time introduce a mechanism of
having understanding among individual divisions so that they work together for the overall profit
of the organization.

7(c) Explain briefly the different types of transfer pricing methods

Suggested answers

Transfer pricing Methods

a) Market based transfer pricing

b) Cost-based transfer pricing : Standard cost , Profit mark-up
c) Upstream Fixed Costs and profits : Two step pricing, Profit Sharing, two sets of prices

. Q8(a) Suggested Answer

(i) Total Variance = 21, 67,000 - 22,37,500 = 70,500(A)
(ii) Sales Price Variance = (AP BP) X AQ = 264000(A)
GamePro (35-38) X 11000 = 33,000(A)
GameSmo (28-27) X 44000 = 44,000(F)
GameKid (10-15) X 55000 = 275,000(A)
Total = 264,000(A)
(iii) Sales Volume Variance = (AQ BQ) X BP = 193,500(F)

GamePro (11000-12500) X 38 = 57,000(A)

GameSmo (44000-37500) X 27 = 175,500(F)
GameKid (55000-50000) X 15 = 75,000(F)
(iv) Sales Mix Variance
Product Budgeted or Standard Revised standard Actual sales
sales (Units) sales (Units) (Units)
GamePro 12500 13750 11000
 GameSmo 37500 41250 44000

GameKid 50000 55000 55000

100000 110000 110000

Sales Mix variance = (AQ RSQ) X SP

GamePro (11000-13750) X 38 = 104,500(A)

GameSmo (44000 -41250) X 27 = 74,250(F)
GameKid (55000-55000) X 15 = NIL
Total = 30,250 (A)

(v) Sales Quantity Variance = (RSQ SQ) X SP

GamePro (13750-12500) X 38 = 47,500(F)
GameSmo (41250 -37500) X 27 = 101,250(F)
GameKid (55000-50000) X 15 = 75,000(F)
Total = 223,750(F)
(vi) Reconciliation

Total Variance = Sales Price Variance + Sales Volume Variance

= 264000(A) + 193,500(F) = 70, 500 (A)

Sales Volume Variance = Sales Mix Variance + Sales Quantity Variance

= 30,250 (A) + 223,750(F) = 193500(F)

8(b) Limitations

(i) Shows where is the variance and does not explain why the variance
(ii) Does not say whether the variance is significant
(iii) Performance report generally shows the aggregate
(iv) Does not show future course of action
(v) Sometimes good performance of one is offset by very poor performance of
another.