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Question Description

Week 5 Discussion – Budgeting

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Consider the following situation:

Gavin Gibbons, managing partner of the venture capital firm, Smith and Gibbons, was dissatisfied with the top management of CPC, Inc., a manufacturer of computer processing chips. Smith and Gibbons had invested $30 million in CPC, Inc. and their return on investment had been below expectations for several years. In a tense meeting of the board of directors of CPC, Gibbons exercised his firms’s rights as the major equity investor in CPC and fired CPC’s chief executive officer (CEO). He then quickly moved to have the board appoint himself as the new CEO.

Gibbons prided himself on his hard-driving management style. At the first management meeting, he asked two of the managers to stand and fired them on the spot, just to show everyone who was in control of the company. At the budget review meeting that followed, he ripped up the departmental budgets that had been submitted for his review and yelled at the managers for their “wimpy, do nothing targets.” He then ordered everyone to submit new budgets calling for at least a 40% increase in sales volume and announced that he would not accept excuses for results that did not meet this target.

Kim Keller, an accountant working for the production manager at CPC, discovered toward the end of the year that her boss had not been scrapping defective processing chips that had been returned by customers. Instead, he had been shipping them in new cartons to other customers to avoid booking losses. Quality control had deteriorated during the year as a result of the push for increased sales volume, and returns of defective product were running as high as 15% of the new processing chips shipped. When she confronted her boss with her discovery, he told to to mind her own business. And then, to justify his actions, he said, “All of us managers are finding ways to hit Gibbons targets.”

In your post, comment on the following:

  • Is Galvin Gibbons using budgets as a planning and control tool?
  • What are the behavioral consequences of the way budgets are being used at CPC, Inc.?
  • What do you think Kim Keller should do in this situation?