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