Airtex Aviation - Cost Control Study Case

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Executive Summary

Two managers recently graduated purchase Air Tex Aviation, a firm on the verge of bankruptcy. In front of the discrepancies of the current control system, Ted Richards and Frank Edwards decide to implement a system which improves transfer pricing, cost allocation and autonomy. Therefore, this case wonders about the difficulties to implement it and the steps to change the management style. It

What appears to be the problem in Air Tex is linked to business which is linked with the state of mind of the staff: there is a lack of motivation. The company is on the verge of bankruptcy because of Sarah Arthur’s accounting system and accounting statements. We know that it is a problem because of the self-interested behavior of Sarah Arthur in the company since 20 years. She monopolizes the decisions and the power.

The issues of autonomy, cost allocations and transfer pricing are those which have an important impact on Air Tex profitability and its strategic vision. The issue for Ted and Frank, future managers of Air Tex is to establish a growth over the long-term for the firm with a new strategic view. The problem statement can be summarized as follows:

How can Air Tex grow in the first five year-period?

Data analysis

There are a number of issues before Franck and Ted set up the decentralized control system, which will be analyzed now.

First, there were problems for Ted with the accounting department: over importance of the accountant Sarah Arthur, inexistence of accounting system, a non-clear and defined financial statements, retention of information, great power in the same hands and lack of management skills. It provoked a lack of information for the departments and of a motivation because they are not involved in the decision making process. Decisions are taking arbitrarily, without the search of a consensus.

Then, Ted felt a problem linked to the personnel work ambiance, their seriousness and more over their professionalism. This entails again a lack of information and motivation, important causes of the issue. There is also a lack of innovative spirit, because staff is for a long time in the company and there is no turnover or flexibility, which don’t encourage him. There is a static hierarchy, without possibility of evolution.

Ted and Frank faced a problem when they take decisions of acquiring the company because of a lack of skills: they have a poor knowledge about the aviation business and structural errors were made in the projections (running out of money for the end of the year). Then, there is a difficulty to understand the accounting system and the economical situation is exigent. Indeed, the figures in the balance sheet for Air Tex aviation appear to be very disorganized. Cost allocation for the accounting department and the volume of expenses are not very justified ($392,350). Moreover, all the departments have a negative net income except the fuel line activity which employed unskilled employees. We notice that inventory is a budget item too much important, mainly aircraft inventories (515,000$) which will not enable to invest in the future.

Key Decision Criteria

We saw the different issues about the old management control system. To change it and implement a new system, Ted Richards and Frank Edwards took few key decisions on:

The strategic view

With new owners, the strategic view of AirTex Aviation must be redefined. Because the firm is near of the bankruptcy, Ted and Franck design a new long term strategy which reduces costs, decentralizes management decision process; implements new management styles and defines clear way to growth and move in the aviation market.

The objectives

One of the first steps is to identify Specific, Measurable, Acceptable, Realizable, and Timetable objectives at each level of the enterprise (divisional and top level). At the top level, one of these new objectives is to improve profitability of...
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