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BELANGER & SEQUIN
Class Announcements
Final Exam 7:00pm April 11, 2014 Leadership Conferences:
1) KPMG Executive Look March 26, 2014 www.kpmgfit.ca
2) Deloitte Leadership Conference Information Session Wednesday, March 5 – 5:00 to 6:00pm Schwartz 205
Service Learning Assignment: Progress report is due following client meeting;
progress report is a group submission; details or requirements are on-line.
Class Objectives
1. Assessing management control systems in context
2. Understanding the impact on behaviour of a evaluation system
3. The evaluation system in context, impact of:
1. Transfer price2. Responsibility centre designation3. Investment centre4. ROA as an evaluation metric
Belanger & Sequin : Context
A boat and inboard engine manufacturer Three divisions:
Engine – concentrated on diesel single engine for the last 5 years; capacity of 8000 hours per year (2 hours per boat)
Boat –labour intensive operation; operated below planned production last year because sales projections were 950 orders lower; capacity is 200,000 DLH
Sales – sole Canadian distributor for new Fujiama sailboats; want to capture growth in recreational boating with a new 20 ft fiberglass sport boat
Falling profits have reduced ROA to 9.3% overall
Resentment is growing among divisions
Belanger & Sequin : Issues
1) Assess Divisional Profit Transfer price between divisions
2) Impact on Overall Profitability Impact of Fujiama sailboat (1,500) Impact of 20 foot fiberglass sport boat (1,250)
3) Assessment of Management Control System - Evaluation System Responsibility centre designation –Investment
Centre Evaluation metrics – Return on Assets (ROA)
Belanger & Sequin: Transfer Price Options for setting Transfer Price:
Current price - $4,100.00 Market price - $5,000.00
Capacity is 8000 hours/ 2 hours per engine is 4,000
Net market prices - $ 4,490 Selling price $5,000 – commission $510 =
$4,490 Variable cost - $2,200
DM $800 + DL $1,000 + VOH $400 = $2,200
1. Belanger & Sequin : Profit and ROA by Division (Exhibit #1)
Engine Division
Boat Division
Sales Division
Total Divisions*
Sales ........................................................... Cost of goods sold ......................................
$19,280 12,800
$16,800 14,880
$53,112 38,400
$69,112 46,000
Gross margin .............................................. Selling and admin. .....................................
6,480 4,832
1,920 2,400
14,712 13,967
23,112 21,199
Pretax income ............................................. $ 1,648 $ (480) $ 745 $ 1,913
Assets controlled by divisions ................... $10,000 $ 4,500 $ 6,000 $20,500
Pretax divisional return on assets .............. 16.5% (10.7)% 12.4% 9.3%
1. Belanger & Sequin : Engine Division (Exhibit #2)
1. What profit if sell all 4000 to external market? 2. What profit is sell only current level
externally?
Per Unit
External Internal Units Total
Sales: External ................................................... Internal ....................................................
$5,000 $4,100
3,200 800
$16,000,000 3,280,000
Total Sales ............................................................ 4,000 $19,280,000
Direct materials .................................................... Direct labor .......................................................... Variable overhead* ............................................... Fixed overhead* ................................................... Sales commissions ............................................... Fixed selling & admin. ........................................
800 1,000
400 1,000
510 800
800 1,000
400 1,000
- 800
4,000 4,000 4,000 4,000 3,200 4,000
3,200,000 4,000,000 1,600,000 4,000,000 1,632,000 3,200,000
Total costs ............................................................ 4,510 4,000 $17,632,000
Pretax income ....................................................... $ 490 $ 100 $ 1,648,000
1.Belanger & Sequin : Engine Division Sensitivity Analysis
Per Unit Per Unit Per UnitExternal Units Total External Units Total External Units Total
Sales: Internal 4,100 800 $3,280,000Sales: External $5,000 3,200 $16,000,000 $5,000 4,000 $20,000,000 $5,000 3,200 $16,000,000
Direct materials 800 4,000 3,200,000 800 4,000 3,200,000 800 3,200 2,560,000Direct labor 1,000 4,000 4,000,000 1,000 4,000 4,000,000 1,000 3,200 3,200,000
Variable overhead* 400 4,000 1,600,000 400 4,000 1,600,000 400 3,200 1,280,000
Fixed overhead* 1,000 4,000 4,000,000 1,000 4,000 4,000,000 1,250 3,200 4,000,000
Sales commissions 510 4,000 1,632,000 510 4,000 2,040,000 510 3,200 1,632,000Fixed selling & admin. 800 4,000 3,200,000 800 4,000 3,200,000 1000 3,200 3,200,000Total costs 4,510 $17,632,000 4,510 $18,040,000 4,960 $15,872,000Pretax income $412 $1,648,000 $490 $1,960,000 $40 $128,000
ROA (status quo) 16.50% 16.50% 16.50%Investments 10,000,000 10,000,000 10,000,000 ROA (revised) 19.60% 1.28%
4000 External Sales 3200 External SalesStatus Quo
1.Belanger & Sequin : Boat Division (Exhibit #3)
1. What profit is transfer price was $2,200 2. What profit is sales level was as
anticipated 1,750 (800 actual + 950 expected additional)
Per Unit Units Total
Sales: Internal ................................................................................... $21,000 800 $16,800,000
Engines transferred-in ....................................................................... Other direct materials ........................................................................ Direct labor* ...................................................................................... Variable overhead ............................................................................. Fixed overhead .................................................................................. Fixed administration .........................................................................
4,100 3,800 4,200 2,000 4,500 3,000
800 800 800 800 800 800
3,280,000 3,040,000 3,360,000 1,600,000 3,600,000 2,400,000
Total costs ......................................................................................... $21,600 $17,280,000
Pretax income .................................................................................... $ (600) $ (480,000)
1.Belanger & Sequin : Boat Division Sensitivity Analysis
Per Unit
Units Total Per Unit
Units Total Per Unit
Units Total
Sales: Internal $21,000 800 $16,800,000 $21,000 800 $16,800,000 $21,000 1750 $36,750,000Engines transferred-in 4,100 800 $3,280,000 2,200 800 $1,760,000 4,100 1750 $7,175,000Other direct materials 3,800 800 $3,040,000 3,800 800 $3,040,000 3,800 1750 $6,650,000
Direct labor* 4,200 800 $3,360,000 4,200 800 $3,360,000 4,200 1750 $7,350,000
Variable overhead 2,000 800 $1,600,000 2,000 800 $1,600,000 2,000 1750 $3,500,000Fixed overhead 4,500 800 3,600,000 4,500 800 3,600,000 2,057 1750 3,600,000Fixed administration 3,000 800 2,400,000 3,000 800 2,400,000 1,371 1750 2,400,000Total costs $21,600 $17,280,000 $19,700 $15,760,000 $17,529 $30,675,000Pretax income -$600 -$480,000 $1,300 $1,040,000 $3,471 $6,075,000
ROA (status quo) -10.70% -10.70% -10.70%Investments 4,500,000 4,500,000 4,500,000 ROA (revised) 23.11% 135.00%
Actual Sales - Engines at $4,100 Expected SalesActual Sales - Engines at $2,200
1.Belanger & Sequin : Sales Division (Exhibit #4)
1. What profit if redirected sale to BSL at 1,750 (keep total boat sales @ 2,000 in total)
Fujiama Sailboat
BSL Inboard
Total
Sales price per unit .............................................................. $ 25,260 $28,500
Sales volume (units) ............................................................ 1,200 800 2,000
Total sales ...........................................................................
$30,312,000
$22,800,000
$53,112,000
Boats (including engines) ................................................... Commissions (15% sales) ............................................... Fixed selling & admin. .......................................................
21,600,000 4,546,800 3,600,000
16,800,000 3,420,000 2,400,000
38,400,000 7,966,800 6,000,000
Total Costs .......................................................................... $29,746,800 $22,620,000 $52,366,800
Pretax income ..................................................................... $ 565,200 $ 180,000 $ 745,200
1.Belanger & Sequin : Sales Division Sensitivity Analysis
Fujiama BSL Fujiama BSLSailboat Inboard Total Sailboat Inboard Total
Sales price per unit $25,260 $28,500 $25,260 $28,500Sales volume (units) 1,200 800 2,000 250 1750 2,000
Total sales $30,312,000 $22,800,000 $53,112,000 $6,315,000 $49,875,000 $56,190,000Boats (including engines) 21,600,000 16,800,000 $38,400,000 4,500,000 36,750,000 $41,250,000
Commissions (15% ´ sales)
4,546,800 3,420,000 $7,966,800 947,250 7,481,250 $8,428,500
Fixed S&A 3,600,000 2,400,000 $6,000,000 3,600,000 2,400,000 $6,000,000Total Costs $29,746,800 $22,620,000 $52,366,800 $9,047,250 $46,631,250 $55,678,500Pretax income $565,200 $180,000 $745,200 -$2,732,250 $3,243,750 $511,500
ROA (status quo) 12.40% 12.40%Investments 6,000,000 6,000,000 ROA (revised) 8.53%
Planned - 1,750 BSL BoatsActual - 800 BSL Boats
1.Belanger & Sequin : Overall Analysis
BSL BOAT CM and BE AnalysisSale of BSL Boat 28,500
Variable Costs:Engine Direct materials 800
Direct labor 1,000
Variable overhead* 400
Sales commissions - Boat Other direct materials 3,800
Direct labor* 4,200
Variable overhead 2,000 Sales Commission 15% 4,275
16,475
Contribution Margin 12,025
Fixed Costs:
Engine Fixed overhead* 4,000,000
Fixed selling & admin. 3,200,000 Boat Fixed overhead 3,600,000
Fixed administration 2,400,000 Sales Fixed selling & admin. 2,400,000
15,600,000
Break-even 1,297
2. New Boat Profitability Analysis
Fujiama Fibreglass FibreglassSailboat Board Total Board
Sales price per unit $25,260 $15,200 Transfer Price $8,950Sales volume (units) 1,500 1250 2,750 Sales volume (units) 1250
Total sales $37,890,000 $19,000,000 $56,890,000 Total sales $11,187,500Boats (including engines)
27,000,000 11,187,000 $38,187,000 Other direct materials 1,472 1,840,000
Engines 4,375,000 $4,375,000 Direct labor* 3,360 4,200,000
Commissions (15% or 10% sales)
5,683,500 1,900,000 $7,583,500 Variable overhead 1,000 1,250,000
Fixed S&A 3,600,000 2,175,000 $5,775,000 Fixed Overhead 2,500,000Total Costs $36,283,500 $19,637,000 $55,920,500 Fixed S&A 1,250,000Pretax income $1,606,500 -$637,000 $969,500 Total Costs $11,040,000
Pretax income $147,500ROA (sgtatus quo) 12.44%Investments (revised) 9,000,000 ROA (status quo) -10.70%ROA (revised) 10.77% Investments (revised) 3,800,000
ROA (revised) 3.88%
Sales Divsion Boat Divsion
3. Belanger & Sequin: Assessment of Evaluation System
Responsibility centre designation Investment Centre
Any internal transfer of engines and boast is determined by the sales division estimates of the potential market
Evaluation metrics ROA
Pretax divisional income divided by assets controlled by the division
3. Belanger & Sequin: Assessment of Evaluation System
Each division is evaluated on ROA Engine – ROA is 16.5%
Commission ($510/engine) on external sales – 4,200 units
No commission on internal sales – 800 units Transfer pricing – breaking even on internal sales
Boat – ROA is (10.7%) No commission - internal sales only No outside sales – determined by Sales
Sales – ROA is 12.4% Commission on boats, higher commission on
Fujiama Commission on BSL greater than Fujiama
Class Objectives - Revisited
1. Assessing management control systems in context
2. Understanding the impact on behaviour of a evaluation system
3. The evaluation system in context, impact of:
1. Transfer price2. Responsibility centre designation3. Investment centre4. ROA as an evaluation metric