3) as far as goal congruence is concerned, managers should not be paid in accordance with the total net profit of the company, but only in accordance with the one obtained by them.

Another change that should be applied is allocating the non-traceable costs according not to the total revenues of a division, but to the traceable costs incurred by that particular division, since managers should try to minimize costs as much as possible. However, that would mean that the managers would disregard revenues in favor of costs. Therefore, a more relevant indicator of a manager's performance is the cost margin (excluding non-traceable costs). That is, calculating the total traceable costs divided by the total revenues of a division. This indicates how efficient a manager actually was, since the higher the cost margin is, the higher the chance of the manager to get sacked.

However, this brings forth another issue. If only traceable costs are considered, it means that some managers will get stuck with non-traceable costs that they have not benefited from. After all, the business environment in Paris or New York is certainly different than the one in Little Rock, Arkansas. Therefore, not only the traceable costs have to be considered, but some kind of difficulty factor should be attributed to each division, according to the toughness of the particular business environment. The products that Creative Consumer Consultants Ltd. offers are harder to find in Little Rock, but are certainly available in Paris. Therefore, the Paris manager might be twice as good as the one in Little Rock but has to face tougher competition. The company should probably leave the big-city market and concentrate on small town initiatives, which seem to be highly beneficial.

As a conclusion, I would say that the company has to concentrate on doing business in smaller communities,...

There are approximately 144,000 Kmart associates, including 2,400 associates at Kmart's headquarters in Troy, Michigan.
Pharmacy services are available in 1,152 Kmart stores. Food Service: 307 Kmart stores offer full Little Caesar's Pizza Stations and 863 locations offer Little Caesar's as a part of its menu for a total of 1,070 stores with a food service presence. (www.kmart.com) could find no data regarding the allocation of non-traceable costs between Kmart's divisions. However, I though of an example that might well fulfill the requirements of this exercise.

Let's assume that the total revenue Kmart obtains from North and South Carolina in a year reaches $1.00 billion. For the benefit of the exercise, we could assume that the following data is correct:

North Carolina

South Carolina

Revenue

Variable Costs

Contrib. Margin Division Specific FC

Division Margin

Common Costs

Net Income found that the Division Margin is the same for both the North and the South Carolina divisions, although, if common costs are allocated in accordance with the revenue obtained by the two entities, the South Carolina division is barely making it, while the North Carolina division, although having less activity, has a 20 million Net Income