P
rofessors Kenneth A. Merchant and Wim A. Van der Stede wrote this teaching note as an aid to instructors using the AirTe
x
A
viation case.
Marshall School of Business
University of Southern California
AirTex Aviation
Teaching Note
Purpose of Case
This case was written to illustrate a basic control system choice. Two young and inexperienced
MBA graduates purchase a small aviation company that is in financial trouble. If the company
will survive, it will do so only with tight management of cash and new accounting and control
systems.
The company also needs to make better operating decisions. However, the new owners do not
know the business well, so they cannot either centralize authority or be very prescriptive to the
Suggested Assignment Questions
1. Did AirTex need a new control system at the time of the takeover?
2. Evaluate the control system that Frank and Ted implemented. Should anything have been
done differently?
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
Case Analysis
Does AirTex Need a New Control System?
A reasonable way to start the discussion is to ask, How is AirTex doing? Exhibit 2 in the case
shows the income for the 4 months immediately preceding the purchase. These numbers can be
summarized and annualized as is shown in Figure TN-1. These numbers show that the company
is losing about $100,000 on an annualized basis.
This analysis can also be done on a cash flow basis. This analysis shows that the companys
What is Important in This Company? (Key Recurring Decisions)
Early in the class, it is useful to clarify what is important in managing this business. We like to
develop this idea by assembling a list of key recurring decisions that must be made well. The
question that should be asked when trying to judge the completeness of the list of decisions
identified is, If the company makes all these decisions well, is there a good chance that the
Teds Use of the Control System
In the case, Ted says that his key challenges are
2. Installing a control system to support management and provide information to make
decisions;
3. Taking control from Sarah.
Ted seems to feel that the primary way to achieve profitability is through better information. It
is hard to disagree with this, but some students might argue that such a formal control system is
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In defense of this style of management, students will make the following points:
2. It frees Teds time so that he can do more important things;
3. Decentralization gives authority and responsibility to department heads.
2. It could easily fail. Taking decisions away from people who dont know what they are doing
3. Decentralization is a sham. Frank and Ted will make all the decisions anyway.
After allowing this discussion to proceed for a while, it is useful for the instructor to ask, How
does Ted think the control system is going to increase profitability? The answer is not that
managers are going to be motivated because of information, decentralization, and the joys of
autonomy. Quite the opposite. Ted says in the case that he wants the managers to make
What Did Ted Do?
The discussion of the details of the control case can be divided into five subparts: control of
cash, cost allocations, transfer pricing, authority, and information flow.
Control of cash
With the backdrop of the tight cash situation, the students can be asked, Would you have given
responsibility for cash and credit to Will Leonard and Roy Douglas? Actually, this
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
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Cost allocations
The key fact to bring out in the discussion of the allocation policy is that the dollar amount
Transfer pricing
The instructor can ask about the implications of, say, the flight school going to a competitor for
maintenance. What should Ted do if that happens once a week? Once a day?
Here is a more detailed scenario that can be presented to the students:
One of AirTexs competitors on the field offers the flight school a 40% discount on the labor
rate if all maintenance is done at the competitors shop. The AirTex shop manager says that he
Authority and responsibility
The authority issue can be started with the beard issue. Did Frank and Ted handle this correctly?
Most student will conclude that the answer to this question is no. By now in the discussion, the
value of the independence of the department managers has been well established.
Try a few other examples:
What if Ted feels that a department manager is making a bad decision with a minor profit
Information flow
Students can be asked about the Daily Reports (Exhibit 4) and the monthly Profit Center
Reports (Exhibits 57). These are the heart of the results control system.
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Why No Budgeting?
Instructors should ask students about the companys planning and budgeting system. They dont
have one! Should a company operating in a decentralized fashion have budget targets? Ted and
Will this System Work?
1. Wildly successful?
2. A muddling-along survivor?
3. A bankruptcy statistic?
Most students will predict success, but others are not so positive. In actuality, AirTex was a wild
success. Over the eight years following the time of the case, the company grew its revenues 15-
fold, and reported annual profits greater than $5 million. The control system remained in place
virtually unchanged and was credited as being one of the key elements of success.
Arguments For and Against Decentralization
This is really a case about decentralization and results control. (Control in a decentralized
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
193
Arguments for decentralization
1. Give authority and information to the people who understand the business the best
2. Motivation
4. Positions the company for growth
a. Develop management team
Arguments against decentralization
1. May have decisions made by inexperienced people with lack of knowledge of business
3. Some people dont understand and dont want autonomy
5. Some top managers cant let go; they have a psychological need to be involved in all the
key decisions.
Pedagogy
There is a lot that can be done with this case. Instructors must manage the time carefully in
order to ensure coverage of the topics they deem most important. Here is one possible allocation
of time for covering the issues discussed in this teaching note:
1. Does AirTex need a new control system? 10 minutes
2. What is important in this company? 10
3. The control system (elements, pros and cons) 40
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
194
Figure TN-1
How Healthy is AirTex?
SeptemberDecember 1989
Department (fully allocated) 4 months Annualized
Fuel Line $130,880 $392,640
Service 67,310 (201,930)
Figure TN-2
Key Recurring Decisions, Old vs. New System
Decision Old system New system
Purchasing (supplies, inventory equipment) DM11 DM
Grant credit DM DM
Figure TN-3
Cash Control
Department responsible for: Accounting responsible for:
11 Department manager