Introduction:

C&V was founded by Murray Silberman in 1946 in New York City. C V provides services of
audit tax financial and consulting services. The focus of this company was on small and medium
businesses. The office was opened johns town in 1976 for the local companies.
In 1993 employees were 24 and the annual revenue was 0.6 million. During 4 years the
employees were 26 and the revenue rose to 2 million. In late 1998, there were 31 employees at C
&V with 22 salaried employees and 9 were hourly based. The firm followed a pseudo pyramid
structure. There were 6 partners and Catanese with major share holding. There were 3 managers,
10 professionals and 3 Para-professionals (Exhibit 1). If C&V is sold the proceeds from the sales
would be divided in 6 equal partners.
Issues

I.

Employee billing rate was incorrectly calculated.

The billing rate was calculated without considering the overheads. To get the real
picture it must be considered and not only based on the direct labor hours. The
hourly rates were different from each other. It should be measured at the same
level.

II.

Lack of communication to employees and partners.

There was no proper communication between the employees and the partners.
There should be centralization

III.

Reporting problem.
The time was not reported accurately. Employees considered that there work is of
no value so they dont report accurately.

IV.

Rates were based direct labor hours.

There are many factors to be considered. If it is based on only one thing and not
considering the other factors it will not the true picture of the operations.

V.

Overheads were not considered.

The cost will surely rise if the overheads are ignored and not considered.

Changes in performance measurement system

The billable hours were increased in 1998.

The cost per hour was decreased.
Impressive increase 350% in profit.

Incentive Plan
As per the incentive plan the first $100,000 will be distributed among all in the following
way.

60% will be divided in the 6 partners i.e. 10% each.

20% will be given to the mangers
10% to professionals and Para-Professionals
And the remaining 10% will be reinvested into the business.

The total manager bonus was broken into two categories:

Non discretionary 50%

Partners discretionary 50%

Options
I.
II.
III.

Acknowledge the trend and merge with other small CPA firm.
To sell C&V.
Providing the financial and ratio services to the clients

Analysis
C &V should conduct the different financial and ratio analysis and implementing appropriate
performance measurement and incentive systems for clients.

Table 1
1996

1997

1998

ROI

11.25%

9.594923%

36.1924%

Turnover

1.674198

1.56805

1.6399

Margin

6.7%

6.11%

22.068%

The above table shows the Return on Investment ratio of different years. In 1998 the ROI is high
and positive which is 36.1924%. It indicates that the Cataese and Vulcan Co. is able to earn with
its total assets. This increase is caused due to change in the measurement performance system.
Table shows the net profit margin which indicate that in 1998 the net operating margin is higher
than 1997 by 6.11% to 22.068%. The net operating margin tells us that C& V earned on each
dollar to generate its revenue or sales. It also indicates that that C& V is efficient to control their
costs. The higher the margin, the more C& V is converting its revenue into actual profits.

Table 2

Billable Hours
Average Billing rate
per hour
Value of time worked
Write down of WIP
Billed amount
Effective rate
Overhead
Direct labor
Total cost
Billed amount
Total cost
Profit

1997
31,386
$88
2,761,968
(676,682)
2,085,286
$66
701,865
1,255,822
1,957,687
2,085,286
1,957,687
127,599

1998
36,000
$97
3,492,000
(873,000)
2,619,000
$73
730,000
1,311,000
2,041,000
2,619,000
2,041,000
578,000

Variance
4,614
9
730,032
-196,318
533,714
7
28,135
55,178
83,313
533,714
83,313
450,401

This table shows the financial statement of C& V after adoption of new performance
measurement system. In recent year the company has an increase in profit by 350% this mainly
causes due to some changes in this year. In 1998 the C& V increased price by 88 to 97, to
increase the profit margin C& V take this step in price. Growth rate, profits of C& V also
increased in 1998. C& V also changed their cost allocation system. Table 5 shows the variance

analysis of C& V which indicate that in 1998 the company takes some strategies for growth
which is caused by adaption of new performance measurement system.

Track to achieving Goals

Yes C&V is on track to achieve its near term goals because the results of 6 months performance
of firm are very encouraging and shows an optimistic view for future. Following are the financial
goals of firm:

The goal of the firm was to increase the net income for 1999 and 2000 for $900,000 and
$1.4 million respectively and this target is to be achieved by not to increase the billing
rate but rather to increase the billing hours and decreased write-downs.

1998

1999

2000

$578,000

$ 900,000

$1.4 million

growth

350%

56%

50%

Billable hours

36,000

42,000

50,000

Write-downs

$873,000

$733,320

$582,000

$97

$97

$97

Net income

Billing rate

Here in case B the mid-year result of 1999 is given and it shows that the goal set by Catanese for
1999 seen to b achievable. Firms have opportunities for growth in near future. Profit and revenue
were $900,000 and $1.8 million respectively. This shows that the goal of $3.3 million revenue
and $905,000 profit for year end.

DECISISON
Cataese and Vulcan should not go with option 1, 2; C& V must provide consulting services such
as financial and ratio analysis for clients (option 3). C& V should improve their performance
measurement system for consistent growth and profit because due to change in performance
measurement system C& V shows the profits by 350%. Through (MBO) performance

measurement system the employees will be motivated and company performance also increased.
C& V should expand their services for rapid development in certified public accountant.