Polysar Limited Essay

Executive SummaryThis report seeks to explain the key differences between the NASA (North Ameri layabout South American) and EROW (Europe and rest of world) sales performance everyplace the past nine months. There are several reasons causing the sales performance figures currently stemming from NASA to be incomparable with the EROW numbers, including the current practice of transferring full-grown quantities of invariable butyl rubber from the Sarnia to the Antwerp production facilities.As Polysar ope scores globally, it is also important to consider certain international aspects and detail risks. These include, foreign bills exchange fluctuations, potentially creating gains or losses, as well as international taxes and tariffs. The decisions made regarding allocation of bring ins between the two geographic centers leave alone swayly impact the taxes paid in any location. ADD ON WITH SPECIFICS IntroductionA high-level overview of Polysar Limited provides an all-encompassing image of the nature of this case, necessary to later effectively focus in on specific financial details and problems. Polysar is Canadas largest chemical company, with the North American production facility located in Sarnia Ontario. The company splits into 3 main groups including petrochemicals, modify products, and rubber, 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 cecal appendage 1 for graphical representation). Both geographic centers produce both regular butyl and halobutyl rubbers. In 1985, Sarnia opened a second production facility that has not nevertheless reached capacity. By comparison, Antwerp has only one facility operating at full capacity and still 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 ca characters of concern regarding sales performance figures. In order to right on and efficiently asses the current situation, we testament be reviewing a number of criteria, and from there introduce and analyze several alternatives presented by these assessments. Further RecommendationsTransfer PricingAs you are aware, the NASA segment is currently charging EROW for the butyl rubber being transferred in order to meet the European demand. This charge is currently calculated on the basis of NASAs cost. This is only one of three possible approaches that are used to set to transfer equipment casualtys internally within Polysar Limited. The three options that may be considered are1. punctuate transfer prices at cost2. Set transfer prices at a negotiated mutually agreed upon level 3. Set transfer prices at the market fosterCurrently, as th e first option is implemented, this is causing the two major problems. The first is in regards to the product mix 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 instruction 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 nest egg for that product line is higher than transportation costs of shipping to the other facility.Additionally, another problem being experienced through the current transfer determine 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 mulish costs pertaining to the costly initi al investment 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 terms of which to use for Polysar Limiteds Rubber Segment, setting prices at cost hereby benefits the EROW center, whereas using market price would benefit the NASA segment. This is because then NASA is recording revenue for the units transferred, whereas EROW allow for not, (provided that the prices in both markets are similar international arbitrage).With Polysars company wide profitability in mind, as well as spirit of integrity 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 assoc iated 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 incarnate tax rate applied in North American versus Europe should be considered. Furthermore, management 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. plastic Versus Static Budgetary SystemsCurrently Polysar employs a static budget organisation for their budgeted level of rubber sales. However, if more butyl or halobutyl rubber is produced and then sold these will cause a variance as composed to budgeted figures. Forexample, variable costs will go up, however this may simply be in direct correlation to the increased rubb er produced.It is important to be able to analyze if variances are based on volume or cost differences. By examine the cost variances more closely after implementing this flexible budget system, a better evaluation of managements performance may be achieved. This can be directly used when considering compensation for private instructors. 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 due to managers with specific rubber cost knowledge being involved, it can cause a conflict of interest that may be costly. It is essential, and highly recommended that the NASA rubber division be a budgetary committee to review the estimates made to ensure the lower level management has not added in budgetary slack intentionally in an effort to achieve their compensation figures based on meeting 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 exceeding 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 fundamentally responsible to explain the differences between the actual and budgeted results.In order to negate the previously mentioned conflict of interest, it is recommended to include the amount of variance in a managers estimate in the calculate of compensatio n, hereby eliminated large bonuses if the original estimate was not within a certain range of the actual rate (extra-ordinary occurrences excluded). Hedging of RiskThe nature of the Polysars business contains a certain academic degree ofspecialized risk. First and foremost, operating internationally in various currency zones contributes to foreign exchange risk. This can be hedged through capital markets, resulting in lowering 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 trade good price risks through capital markets or advance purchase of these oil inputs. This can provide more stability for Polysar Limited as a whole, oddly the key rubber division.Capacity AnalysisAppendicesAppendix 1Polysar Rubber