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Dravo Manufacturing's management report shows a division's operating profit rising 12% year on year. A note shows that the division cut its research spend by 40%, deferred maintenance and its defect rate and warranty claims have started to rise. Which assessment of the report is MOST appropriate?

The profit rise is probably short-term and unsustainable, because it was achieved by cutting research and deferring maintenance while defects and warranty claims rise. The report should show profit alongside innovation, quality and asset-condition measures so that readers can see the long-term cost of the apparent improvement.

  1. APerformance has improved because profit, the primary objective, increased
  2. BThe profit increase is likely short-term and unsustainable, so the report should present profit alongside innovation, quality and asset-condition measuresCorrect
  3. CDefect rates should be excluded because they are operational rather than strategic
  4. DThe research cut proves management is following a differentiation strategy

Explanation

Cutting discretionary spend inflates current profit but damages future capability and quality, as the rising defects and claims suggest. A balanced report that links financial results to innovation, quality and asset measures exposes this short-termism. Excluding defects would hide the evidence, and cutting research is inconsistent with differentiation.

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