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JeffStreet Corp Performance Evaluations

The Promotion and Advertising Department at JeffStreet Corporation coordinates point of purchase promotions for its distributors. Employees of this department are graphic arts or marketing majors who develop campaign materials and conduct market research. The department does not collect any revenue for these services. The department manager is evaluated based on the department's ability to operate within its budget. For the last several years, the manager has had to curtail many promotional programs a month before year-end in order to stay within budget.

Sales personnel, marketing representatives, and customers frequently complain when these services are terminated. Danielle Backman, the department manager, told a colleague, "I hate taking all this heat every year. But I just can't afford to blow the budget." She also noted that "soon the new budget will be out, and I can give everyone what they want!"

A. What type of responsibility center is the Promotion and Advertising Department?
B. How is the department currently being evaluated? What are the important elements on which the department should be evaluated?
C. What appear to be the reasons for the department's budget problems? What implications does this have for the company?

Solution Preview

A. What type of responsibility center is the Promotion and Advertising Department?

Basically, there are three primary responsibility centers within most companies: 1.) Investment Centers, 2.) Cost Centers, and 3.) Profit Centers. By definition, the Promotion and Advertising Department qualifies as a cost center. A cost center is any part of an organization that does not contribute directly to the profits and adds costs to the operations of the company. Some other examples of cost centers are: research and development departments, help desks and customer service centers.

Even though a cost center demonstrates no direct profit, it indirectly affects profitability or performs some other function critical to the operation of the company. However, indirect profitability is hard pressed to translate into the bottom-line and when cuts and roll-backs are necessary, cost center spending is one of the first units ...

Solution Summary

The Promotion and Advertising Department at JeffStreet Corporation coordinates point of purchase promotions for its distributors. Employees of this department are graphic arts or marketing majors who develop campaign materials and conduct market research. The department does not collect any revenue for these services. The department manager is evaluated based on the department's ability to operate within its budget. For the last several years, the manager has had to curtail many promotional programs a month before year-end in order to stay within budget.

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