Managerial Economics & Organizational Architecture 6th Edition by James Brickley , Clifford Smith ,Jerold Zimmerman

Exercise 13

The Xtrac Computer Company is organized into regional sales offices and a manufacturing division. The sales offices forecast sales for the upcoming year in their territories. These figures are then used to set the manufacturing schedules for the year. Prices of the computers are determined by corporate headquarters, and the salespeople are paid a fixed wage and a commission on sales. The regional sales offices are evaluated as revenue centers. The regional sales manager is paid a small wage (about 30 percent of total pay) and a commission on all sales in her territory (about 70 percent of total pay) that exceeds the budget.
Xtrac has a notoriously bad track record for forecasting computer sales. Its budgets always underforecast sales, and then, during the year, manufacturing scrambles to produce more units, authorizes labor overtime, and buys parts on rush orders. This drives up manufacturing costs. At first, management thought the underforecasting problem was due to high unexpected growth in the computer industry. But Xtrac even underforecasts sales when the economy is slow and the industry growth is below its long-run average.
a. What is the likely reason Xtrac persistently underforecasts sales