Case 26-4

Baldwin Bicycle Company *

Prepared by
Pascale B. Prepetit

for Professor C.E. Reese

in partial fulfillment of the requirements for
MAN 560-Finance for Non-Financial Managers

School of Business/Graduate Studies

St. Thomas University
Miami Gardens, Fla.

Term A6/Fall, 2017

October 6, 2017

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Table of Contents
Issues ............................................................................................................................................... 1
Facts ................................................................................................................................................ 1
Analysis........................................................................................................................................... 2
Conclusion................................................................................................................................................... 4

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Issues

1. How should each issue have described above the resolved?

2. Do you see other problems with the introduction of profit centers? If so how would you

deal with them?

3. What are the alternatives to a profit center approach?

4. Assuming that most of the issues could resolved to your satisfaction, would you

recommend the profit center idea be adopted, or is there an alternative that you prefer?

Facts

In 1991, Piedmont University had a financial crisis. It was facing increasing cost and enrollment

rates have been declining. Only the income of quasi-endowment would be used for operating

purposes, but it had been accumulated out of earlier years surpluses were nearly exhausted. Mr.

Hugh Scott, President of Piedmont University developed measures to help solve the situation. He

raised tuition, froze faculty and staff hiring and reduced operating costs. There was a small

surplus in the year ended June 30, 1993.

Scott hires Neil Malcolm a Piedmont alumnus and a partner of a local management consulting

firm. Malcom reviewed the situation and made the several recommendations. He advised to

increase recruiting and fund-raising activities. He reorganized the university into a set of profit

centers. He also proposed that the dean and other department administrators be responsible for

both review and expenditures of their activities.

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Analysis

1. How should each issue have described above be resolved?

Regarding General administrative costs, charging cost to individual schools would result in

operating statement that would report the extent to which of the schools revenues were adequate

to pay for it own costs plus a fair share of the central costs. The sum of the next incomes reported

to each school would be the net income of the university. This may cause the deans to question

whether the central costs were too high. Another avenue to explore would be not to charge these

costs, or to have only those that can be specifically identified with a given school. Allocating

indirect costs can be criticized. If these costs are charged, the charge should be a budgeted

amount, rather that the actual costs incurred.

The deans would not support giving the president authority to distribute $7milllion as he

chooses. The president should not allocate funds in a way that is perceived to be unfair; he would

lose the support of the deans if he implements this system. The each tub on its own button idea

would not work perfectly. As an example, the theological school does not cover its costs by

some $3.1 million; however, the business school has a surplus off $4.2 million dollars. This

example can lead to a discussion on whether the president should have the authority to allocate

such surpluses to other schools.

On the athletics side, charging a fee for scarce resources as a way of rationing these resources

can be difficult to accept. The university want to encourage intramural athletics, and charging a

fee would not encourage participation.

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The use of outside contractors is an important aspect to the proposal. If the school can use

outside contractors, the maintenance department will have to complete with them. This will

motivate the maintenance department to be more efficient. It must control its costs and get

enough work to break even.

Charging for work performed on the engineering school computers by faculty and students at

other school is debatable.

The university wants to encourage the use of the library and charging for library services is

counterproductive. It would decrease the use of the library even more. In addition, the record

keeping of these transactions would be extremely high and the revenue would not be

considerable.

The idea of establishing cross registration may have its merit. There should be discussion on

deciding what relative weigh is to be allocated to each side of the argument. There is the question

of whether such a chare has an influence on either school form which the students comes or the

school in which the class is located.

2. Do you see other problems with the introduction of profit centers? If so how would you

deal with them.

The problems will arise with the term profit centers when it is brought forward to the deans

and faculty members. Term should be clearly explained to avoid mix conceptions. Senior

management should avoid arguments from becoming hostile. Questions should be answered

clearly and examples should be presented.

3. What are the alternatives to a profit center approach?

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Charging certain expenses to the individual schools and not include them in the formal budgets

would be an alternative. The schools should have a clear view of their operations without the

friction that arises when these costs and revenue are included in the formal accounting system.

By including cost in their budget and by requiring that the schools live within these budgets,

deans will pay attention to the financial management of their areas of responsibilities.

4. Assuming that most of the issues could resolved to your satisfaction, would you

recommend the profit center idea be adopted, or is there an alternative that you prefer.

There were many weaknesses identified in the proposal; however, the cross registration should

be explored further. No other parts of the proposal should be approved by the president. It would

be best if this proposal is discussed and a committee is formed to develop a new proposal. The

next version would be given to the deans and it would be better received as it is coming from

within the school.

Conclusion

The idea of profit centers in universities is increasingly considered by other universities. This

case gives an opportunity to discuss the problems that arise in implementing a profit center

structure. It also points out how a president can make decisions that can affect an organization.

The case is a clear example that that Effective Management Control System should include good

reporting, balance scorecard linked with reward system, fair transfer price and similar goals to

meet strategic objectives.