Assuming Control at Altex Aviation Case Study

Assuming Control at Altex Aviation Case Study The case study involves the purchase of Altex Aviation by two individuals, Theodore Edwards and Frank Richards, who met at the Harvard Business School as graduates. Edwards and Richards had been great friends and decided to own a business of their own, and kept in touch after graduating from the Harvard Business School that led to the purchase of Altex Aviation. At the time of sale, the company was facing financial difficulties and was losing money and sales. Edwards and Richards paid $20,000 for the company’s stock and raised $100,000 as their working capital (Churchill, Merchant & Goodhue, 1988). Altex was a sinking company when Edwards and Richards bought it, had a negative net worth, and the company’s management system had little formality. The two decided to decentralize the company’s authority to various departmental managers since they believed that delegating authority would enable the managers to make better decisions. Besides, they did not have a lot of time and technical knowledge to make all the decisions themselves, and decentralization would make their work easier.

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ASSUMING CONTROL AT ALTEX AVIATION

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Edwards and Richards took over Altex Aviation as equal partners and best friends, Richards becoming responsible for chairman duties. At the same time, Edwards assumed an operating officer's role and president (Churchill, Merchant & Goodhue, 1988). The two partners consulted with each other for essential decisions; they attempted to revamp Altex Aviation’s management, install a control system, and momentarily battle its de facto control by the accounting department. The management control system was to assist managerial functions by providing the necessary information for quick and better decision-making. Edwards decided to set up profit centers for its significant activities.

Profitability Before Takeover Return on assets was: = Net Income/Total Assets Before the takeover, the company had a return on assets of: = 109,000/780,000 = 13.97 %. The company generated a 13.97 % profit from its total assets before the purchase by Edwards and Richards. The gross profit margin for Altex Aviation before the takeover was $657,000.

Accounts Receivables Altex Aviation experienced challenges in managing and controlling their finances since various departments' managers did not understand its receivables and other cash flows. Only Sarah Arthur had experience in accounting; the rest of the departmental managers were amateurs (Churchill, Merchant & Goodhue, 1988). From the company’s balance sheet in exhibit 1, its accounts receivables before the takeover were $25,000 by August 1971 and $49,000 by 1 January 1972. Since the seizure occurred on 29 December 1971, the $49,000 accounts receivable reflect its operations before the takeover. However, after the takeover, Altex Aviation’s accounts receivables increased to $52,000 in February 1972, $73,000 in May 1972, and $91,000 in August 1972. Thus, Altex Aviation’s accounts receivable did not decrease after the takeover.

ASSUMING CONTROL AT ALTEX AVIATION

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Altex Aviation’s had a severe challenge with its management system since it operated in several departments and only had a single accountant that handled all its finances. The accountant, Sarah Arthur, possessed no accounting training herself, and she believed that her department should be the center of all the firm’s information (Churchill, Merchant & Goodhue, 1988). Also, she was reluctant to distribute information, such as mails, to the relevant department heads. Since the department managers did not understand the company’s profitability, they handed money to Sarah at the end of each day. Due to this, the managers could not control the company's accounts receivables, increasing over the period.

ASSUMING CONTROL AT ALTEX AVIATION Reference Churchill, N. C., Merchant, K. A., & Goodhue, E. M. (1988). "Assuming Control at Altex Aviation (A)." Harvard Business School Case 183-058.

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