1. CASE ANALYSIS Berkshire Industries PLC

2. Purpose of case
The use of “economic profit” in a performance measurement system. Such as EVA. In this case, students are asked to evaluate an economic profit measure that involves two common measurement adjustments, capitalization and amortization of advertising expenses, and the elimination of goodwill amortization.
The case also raises some related results control system issues. The system proposed in the case includes automatic ratcheting of performance targets, a results/reward function without thresholds and caps, and a “bonus bank” that smoothes out the bonus awards. Each of these system elements can be evaluated.
Students must also consider some implementation issues.

3. Assignment Questions
Were the Berkshire’s motivations for a new incentive system reasonable? If so, what were their main options for a new system? Was an economic profit-focused system a reasonable choice?

4. Assignment Questions
Use the data pertaining to the Snack Food Division, as shown in Exhibit TN-1, to calculate:
a. The economic profit for the division for 2000 and 2001
b. The economic profit target for the division for 2001
c. The division manager’s bonus payout (% of salary) for 2000 and (Assume that the slope of the payoff line for 2000 was arbitrarily set by Berkshire management to equal 1.0.)

5. Assignment Questions
Assume the base salary of the manager of the Snack Foods Division was ￡120,000 in both 2000 and How much cash would the manager receive from his bonus payouts in 2000 and 2001?

6. Assignment Questions
Evaluate the Berkshire Industries’ new incentive plan. What changes would you recommend, if any?

7. Assignment Questions
Should Mr. Embleton make special adjustments of the economic profit figures or the bonus payouts for personnel in the Spirits Division in 2000 and 2001? Why or why not?