AlarmTek, Inc., makes and sells high-end home security systems. It has two divisions€”a production division and a marketing division. The company treats the production division as a cost center and the marketing division as a revenue center. It evaluates the production division by comparing the actual cost performance to a flexible budget. Similarly, it evaluates the marketing division by comparing actual revenues less marketing and customer care costs to the corresponding budget. The following presents budgeted and actual performance for a recent year.

Required:
a. The production manager was very happy with his performance, but the marketing manager was fuming! Explain why by evaluating their performances.
b. The marketing manager complained severely to the head office:
I helped sell more units, but the quality was bad! Look at my marketing costs! I did not spend any more in sales calls and promotions compared to last year. The only reason my costs are so high is because my department had to offer more after-sales service to handle a lot of customer complaints! I even lost out on revenues. I think my esteemed colleague on the production side is cutting corners to come under the cost budget. I think you have to change the way you evaluate performance.
Do you think the marketing manager might have a legitimate case? Explain.
c. How would you improve the performance measurement and evaluation system to avoid such conflicts in thefuture?

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Bud Actual Production volume (units) Revenues Variable production costs Total fixed production costs Variable marketing and customer care costs Fixed marketing and customer care costs Profit before taxes 45,000 $8,000,000 $8,550,000 $4,000,000 4,050,000 $780,000 640,000 450,000 $2,550,000 2,630,000 40,000 800,000 400,000 250,000