Western Chemical Corporation

Division Performance Measurement

Kelompok 5Bayu Ari Bowo

(1506773791)Iga Cindy Pratiwi

(1506774043)Purnellatika Azani

(1506701123)Yuha Nadhirah Qintharah

(1506701376)

OutlineCorporate Profile

Three examples of WCC’s Plants

Q1 : Problems in measuring division performance

Q2 : Alternative methods for measuring division performance

Q3 : Economic Value Added (EVA)StrengthsWeaknesses

Q4 : Measuring Performance of WCC’s Divisions

Q5 : Explanation of WCC’s investment in Czech Republic, Poland, and Malaysia

Corporate ProfileEst. 1920

1995 Fortune 300 chemical company

Products and services: Chemicals and chemical programs for water and waste treatment

Multinational Corporation (MNC) :4.900 employees35 Plants in 19 Countries

WCC as Multinational Firm

WCC

Wholly Owned

Joint Venture

with Local Affiliates

Three examples of WCC’s Plants

Plant in Czech RepublicJoint VentureTotal investment (Total Assets) of

Plant : $35 - $40 millionWCC’s investment : $5 million

(controlling interest)Most of funding are from Debt (60%-

80%) interestFees under technical agreement are

paid by Joint Venture to WCC as a percentage of revenue as an expense by Joint Venture

Three examples of WCC’s Plants (cont’d)Plant in Poland

Wholly owned (100% owned by WCC)Total investment (Total Assets) of

Plant : $40 - $45 million (include working capital)

No External Debt, No minority interest, No Technical Fee

All transfer price from other WCC’s Plants are reasonable

Three examples of WCC’s Plants (cont’d)

Plant in MalaysiaWholly owned (100% owned by WCC)Total investment (Total Assets) of Plant : $35

millionNo External Debt, No minority interest, No

Technical FeeAll transfer price from other WCC’s Plants are

reasonableAdd capacity in Pacific Region and serving the

global market (“swing plant”)

Dimension of Malaysia Plant

Malaysia Plant

RoM

Produce for its Region

Produce for other region

RoS

Sale to Pacific region from its

product

Sale to Pacific region from other Plant’s

Product

Three examples of WCC’s Plants(the 3rd Quarter Reported Income

in 1995)

 (in thousand $)Czech (joint Venture)

Poland (Wholly owned)

Malaysia (Wholly owned)Region of

Manufacture Region of Sale

9/95 YEAR-TO-DATE 9/95 YEAR-TO-DATE 9/95 YEAR-TO-DATE 9/95 YEAR-TO-DATE

Revenues 11.510 32.536 12.020 36.052 Cost of sales (9.541) (28.458) (12.392) (26.648)Selling, technical expenses, and

administrative expenses (891) (2.529) (3.775) (4.845)Other income/Other charges (209) (121) (685) (285)Income before interest and taxes 869 1.428 (4.832) 4.274 Interest (1.120) - - - Fees (867) - - - Foreign exchange

(60) 34 - - Income (loss) (1.178) 1.462 (4.832) 4.274 Minority interest 532 - - - Taxes - - - (1.710)Net income (loss)           (646)         1.462         (4.832)         2.564 Capital charges 3.600 6.686 Economic value added            (8.432)        (4.121)

Q1 : Problems in measuring division performance

The Different in Ownership structure differences in reported income (Interest and Technical Fees Expenses)

Plant with 2 dimension function (Region of Manufacture and Region of Sales) Two reported income

Lack of good management reporting system

Other external factor : currency fluctuation, income taxes, local economic condition, legal, political forces, and so on.

Q2 : Alternative methods for measuring division

performance

Difference in ownership structure

Difference in reported income

EBIT as measureme

nt base

Plant with 2 dimensional function

Two reported income

Total incremental

analysis system

External Factors(Currency Fluctuation,

Taxes, and so on)

Difference impact in reported

income among Division

EBIT as measurement

base

Alternative Method :1. Margin

(profitability measurement)

2. Aset Turnover (The effectiveness of assets usage)

3. Division ROI4. Residual Incomeno information about the revenue of Region sales from Malaysia Plant’s Product Region of Manufacture only , instead of use total incremental income.

Q3 : Economic Value Added (EVA)EVA After-tax operating income and Acctual cost of

capital difficult to measure performance of WCC’s Divisions with discussed condition

Strengths Help managers to recognize how they create value the

division create wealth for corporation : Positive EVA; vv.

Weaknesses Using of after-tax operating income misleading in

financial performance measurement of multinational firms’ divisions

Accrual distortions Historical financial data

Q4 : Measuring Performance of WCC’s Divisions

No single ratio or method that can provide the complete picture on how the division is performing

Methods :1. Margin Profitability

2. Aset Turnover The effectiveness of assets usage

3. ROI

4. Residual Income

Q4 : Measuring Performance of WCC’s Divisions (cont’d)

  Czech Poland Malaysia

Margin 7,55% 4,39% -40,20%

Assets Turnover 0,31 0,77 0,34

ROI 2,32% 3,36% -13,81%

Residual Income  $(2.506.000)  $(2.397.000)  $(7.982.000)

(in thousand $) Czech (joint venture)

Poland (wholly owned)

Malaysia (wholly owned)

Region of Manufacture

Region of Sale

9/95 YEAR-TO-DATE 9/95 YEAR-TO-DATE 9/95 YEAR-TO-DATE 9/95 YEAR-TO-DATE

Revenues $ 11,510 $ 32,536 $ 12,020 $ 36,052

Income before interest & taxes

$ 869 $ 1,428 $ (4,832) $ 4,274

Avarage operating assets $ 37,500 $ 42,500 $ 35,000

WCC’s investment $ 5,000 100% 100%

Q5 : Explanation of WCC’s investment in Czech Republic,

Poland, and Malaysia

Margin highest profitability : Czech division

Asets TO most effective in asset usage : Poland division

ROI best return on investment : Poland Division

RI all of three divisions had operating income which couldn’t recover WCC’s required return on investment (assume : corporate required rate of return = 12% same with capital charge)

Czech Poland Malaysia

Margin 7,55% 4,39% -40,20%

Assets Turnover 0,31 0,77 0,34

ROI 2,32% 3,36% -13,81%

Residual Income $(2.506.000) $(2.397.000) $(7.982.000)

SuggestionWCC should use total incremental

revenues and costs for evaluating division performance with 2 or more dimensional functions

WCC should not include factors over which manager’s exercise no control

THANK YOU