Read the following scenario and then thoughtfully discuss the questions.
JetSuite, a private jet charter company, prepares the master budget by taking each division manager’s estimate of revenues and costs for the coming period and entering the data into the budget without adjustment. At the end of the year, division managers are given a bonus if their actual division profit exceeds the budgeted profit.
Discuss
What problems do you see with this system?
What are the dangers of using only business unit measures to evaluate the performance of business unit managers?
Recently you overheard a manager at JetSuite saying “If every division manager maximizes divisional income, we will maximize firm income. Therefore, divisional income is the best performance measure.
“Comment on and discuss this statement.