Incidents For Discussion Preferred Widget Company

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Larry Cole has been appointed project manager of the Preferred Widget Company's new widget manufacturing process project. Widgets are extremely price-sensitive and Preferred has done a great deal of quantitative work so it can accurately forecast changes in sales volume relative to changes in pricing.

The company president, "I. R." Widget, has considerable faith in the firm's sensitivity model and insists that all projects that, affect the manufacturing cost of widgets be run against the sensitivity model in order to generate data to calculate the return on investment. The net result is that project managers, like Lany, are under a great deal of pressure to submit re-al'stic budgets so go/no-go project decisions can be made quickly. J. R. has canceled several projects that appeared marginal during their feasibility stages and recently fired a project manager for overestimating Project costs on a new model widget. The project was tolled very early in the design stage and six months later a competitor introduced a similar widget that proved to be highly successful.

Larry's dilemma is how to go about constructing a budget that accurately reflects the cost of the proposed new manufacturing process. Larry is an experienced executive and feels comfortable with his ability to come close to estimating the cost of the proiect. However, the recent firing of his colleague has made him a bit gun-shy. Only one stage out of the traditional four-stage widget manufacturing process is being changed, so he has detailed cost information about a good percentage of the process. Unfortunately, the tasks involved in the process stage being modified are unclear at this point. Larry also believes that the new modification will cause some minor changes in the other three stages, but these changes have not been clearly identified. The stage being addressed by the project represents almost 50 percent of the manufacturing cost.

Questions: Under these circumstances, would Larry be wise to pursue a top-down or a bottom-up budget ing approach? Why? What factors are most relevant here?

General Ship Company

General Ship Company has been building nuclear destroyers for the Navy for the last 20 years. It has recently completed the design of a new class of nuclear destroyer and will be preparing a detailed budget to be followed during construction of the first destroyer.

The total budget for this first destroyer is 590 million. The controller feels the initial project cost estimate prepared by the planning department was too low because the waste and spoilage allowance was underestimated. Thus, she is concerned that there may be a large cost overrun on the project and wants to work closely with the project manager to control the costs.

Question: How would you monitor the costs of this project?

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