Lyle Godfrey has just been hired as the manager of the Production Division of Trudell Corporation. Lyle has many years of experience leading the manufacturing operations of a family-owned corporation in Ontario, prior to being hired at Trudell. One of the reasons Lyle accepted the position at Trudell is the compensation package that was offered. The base salary is somewhat greater than he earned previously, but he will also be eligible for performance bonuses at Trudell, which were not available to him at his previous job. Lyle’s biggest concern when accepting the position at Trudell is the fact that the Production Division here is evaluated as a profit centre. At his previous job, the production operations were evaluated as a cost centre. He plans to meet with top management, hoping to persuade them to change the classification of the Production Division from a profit centre to a cost centre. Aware that you are currently studying management accounting, he has asked for your assistance in preparing for the meeting. He would like assistance in both developing a sound argument to support the classification as a cost centre, and anticipating the argument top management is likely to make for classification as a profit centre. Note that he is not looking for a full report from you. The length of your answers should reflect the marks assigned. (Short and to the point.)

Required: 

1 a) Why does the classification of the Production Division matter to Lyle? Be specific as to how he is impacted if it is a cost centre, and how he is impacted if it is a profit centre. How will performance be measured for each of these types of responsibility centres? 

2 b) What argument would you recommend he use to persuade top management to change the classification to a cost centre? 

3 c) What argument should he anticipate from top management to support their choice of a profit centre? 

4 d) Describe one way in which a profit centre can be made acceptable to Lyle, while still providing the motivational benefits top management is seeking. 

5 e) How would the use of participative budgeting at Trudell affect Lyle? Would this make the classification as a profit centre acceptable? Explain your reasoning. Why might management resist the use of participative budgeting?

Answer rating: 100% (QA)

1 a The classification of the Production Division matters to Lyle because he will be evaluated differently depending on which classification is used I... View the full answer