Polysar Limited Essay Example for Free

Polysar Limited EssayExecutive SummaryThis report seeks to explain the key differences in the midst of the NASA (North American South American) and EROW (Europe and rest of world) sales performance over the past nine months. There be several reasons causing the sales performance figures currently stemming from NASA to be incomparable with the EROW numbers, including the current practice of broadcastring large-mouthed quantities of regular butyl guard from the Sarnia to the Antwerp payoff facilities.As Polysar operates globally, it is also authorized to consider certain international aspects and item risks. These include, foreign currency exchange fluctuations, potentially creating gains or losses, as easy as international taxes and tariffs. The decisions do regarding allocation of profits between the two geographical centers will directly impact the taxes paid in either location. ADD ON WITH SPECIFICS IntroductionA high-level overview of Polysar Limited generates an all-encompassing image of the temperament of this case, requisite to later effectively focus in on specific financial details and problems. Polysar is Canadas largest chemical company, with the North American production adeptness located in Sarnia Ontario. The company splits into 3 important groups including petrochemicals, diversified products, and meritless, of which the latter is the largest representing 46% of sales.This rubber division is the core of the report, as its success is vital to Polysar. The rubber division is split into two geographic centers, in Sarnia Ontario and Antwerp Belgium respectively. (See Appendix 1 for graphical representation). Both geographic centers produce some(prenominal) regular butyl and halobutyl rubbers. In 1985, Sarnia opened a second production facility that has non yet reached capacity. By comparison, Antwerp has only one facility operating at full capacity and til now unable to meet demand for regular butyl rubber. To cope with this, the Sarnia transfers large quantities of its production to Antwerp at cost.The inability of the Sarnia facility to earn a profit from these transferred units represents one of the main causes of concern regarding sales performance figures. In array to correctly and efficiently asses the current situation, we will be criticisming a number of criteria, and from there introduce and break up several alternatives presented by these assessments. Further RecommendationsTransfer PricingAs you be aware, the NASA division is currently charging EROW for the butyl rubber being transferred in order to meet the European demand. This charge is currently calculated on the solid ground of NASAs cost. This is only one of three possible approaches that are used to set to transfer prices internally within Polysar Limited. The three options that may be considered are1. pile transfer prices at cost2. Set transfer prices at a negotiated mutually agreed upon level 3. Set transfer prices at the gro cery store valueCurrently, as the first option is implemented, this is causing the two major problems. The first is in regards to the product prance produced within the Sarnia production facilities. As no profit is recorded for the units that are transferred, the product mix may be decided on a sub-optimal basis.Our team recommends further investigation to determine the necessary information as to if the costs to produce the halobutyl and butyl rubbers within both NASA and EROW. This could lead to decisions of specialization in the Sarnia plants or Antwerp plant for one type of rubber produced if cost savings for that product line is high than conveying costs of shipping to the other facility.Additionally, another problem being experienced through the current transfer pricing approach is that the NASA does not show any profit on the Polysar internal transfer of rubber. Consequently, the EROW segment may record this profit without the same having the additional fixed costs pertain ing to the costly initial enthronisation of the second Sarnia plant amounting $550 million and the associated depreciation. This leads to an unfair representation of profitability for the two cost centers.In monetary value of which to use for Polysar Limiteds Rubber Segment, setting prices at cost hereby benefits the EROW center, whereas using securities industry place price would benefit the NASA segment. This is because then NASA is recording revenue for the units transferred, whereas EROW will not, (provided that the prices in both markets are equivalent international arbitrage).With Polysars company wide profitability in mind, as well as flavour of fairness in representation for both segments using a de-centralized approach, our recommendation is the use of negotiated transfer pricing. This occurs when the NASA and EROW segments collaborate to agree on a selling/purchasing price for the internationally transferred butyl supply. Implementing this will cause both segments to have better information of the costs and benefits associated with the transfer.To narrow down on what this transfer price should specifically be, a range of acceptable transfer prices will provide an estimate.As this is an international transfer, there are even more considerations that become relevant. For example, the corporate tax rate applied in North American versus Europe should be considered. Furthermore, focal point should look specifically into duties, tariffs, foreign exchange rates and risks, as well as governmental relationships. By this token, charging Antwerp a lower transfer price will result in fewer Custom Duty payments as the rubber crosses borders. Flexible Versus Static Budgetary SystemsCurrently Polysar employs a static budget system for their budgeted level of rubber sales. However, if more butyl or halobutyl rubber is produced and then sell these will cause a variance as composed to budgeted figures. Forexample, variable costs will go up, however this may s imply be in direct correlation to the increased rubber produced.It is important to be able to analyze if variances are based on volume or cost differences. By tracing the cost variances more closely after implementing this flexible budget system, a better military rank of managements performance may be achieved. This can be directly used when considering requital for managers. INSERT NUMBERS. Employee Compensation PlanPolysar uses the participative budgetary system, which is directly linked to employee compensation. Although this bottom-up approach to budgeting allows for accurate estimates cod to managers with specific rubber cost knowledge being involved, it can cause a conflict of wager that may be costly. It is essential, and highly recommended that the NASA rubber division establish a budgetary committee to review the estimates made to ensure the lower level management has not added in budgetary slack on purpose in an effort to achieve their compensation figures based on m eeting these targets.However, even the top management currently possesses a huge conflict of interest influencing them in the direction of allowing for budgetary slack as their compensation is up to 50% for both meeting divisional profits, as well as surpass corporate profit targets. These targets can clearly be met, if costs have been artificially manipulated to be higher than expected.As it is improbable to find members of the budgetary committee who will be completed impartial and not subject to a bonus on the premise of meeting profit targets, responsible accounting should be implemented. This system holds each manager responsible for the estimate of the individual cost and revenue basis for which he or she was in charge of deciding. This means, he or she is essentially responsible to explain the differences between the veridical and budgeted results.In order to negate the previously mentioned conflict of interest, it is recommended to include the amount of variance in a manag ers estimate in the calculate of compensation, hereby eliminated large bonuses if the original estimate was not within a certain range of the actual value (extra-ordinary occurrences excluded). Hedging of RiskThe nature of the Polysars business contains a certain degree ofspecialized risk. First and foremost, operating internationally in variant currency zones contributes to foreign exchange risk. This can be hedged through capital markets, resulting in sour risk for the corporation.Also, as there is a great degree of risk for the variable costs of production in relation to the oil, it is imperative to hedge this risk as well. It is very possible to hedge market commodity price risks through capital markets or advance purchase of these oil inputs. This can provide more stability for Polysar Limited as a whole, particularly the key rubber division.Capacity epitomeAppendicesAppendix 1Polysar Rubber