Polysar Limited Essay

Executive SummaryThis report seeks to explain the nominate differences between the NASA (North American South American) and EROW (Europe and rest of world) gross sales performance everyplace the past nine months. There are several reasons causing the sales performance figures before long stemming from NASA to be incomparable with the EROW numbers, including the current practice of transferring banging quantities of regular butyl caoutchouc from the Sarnia to the Antwerp production facilities.As Polysar operates globally, it is also important to depend certain international aspects and specific risks. These include, conflicting currency rally fluctuations, potentially creating gains or losses, as well as international taxes and tariffs. The decisions made regarding tryst of winningss between the two geographic centers get out lookly touch the taxes paid in either location. ADD ON WITH SPECIFICS IntroductionA high-level overview of Polysar Limited wills an all-encompassi ng image of the nature of this case, infallible to subsequently effectively focus in on specific financial elaborate and problems. Polysar is Canadas largest chemical comp any, with the North American production facility determined in Sarnia Ontario. The company splits into 3 main groups including petrochemicals, diversified products, and caoutchouc, of which the latter is the largest representing 46% of sales.This refuge division is the core of the report, as its success is vital to Polysar. The hawkshaw division is split into two geographic centers, in Sarnia Ontario and Antwerp Belgium respectively. (See auxiliary 1 for graphical representation). Both geographic centers produce two 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 integral capacity and still unable to meet demand for regular butyl rubber. To recognize 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 drug abuses of concern regarding sales performance figures. In order to correctly and efficiently asses the current situation, we will be reviewing a number of criteria, and from there introduce and take apart several alternatives presented by these assessments. advertize RecommendationsTransfer PricingAs you are aware, the NASA segment is currently charging EROW for the butyl rubber macrocosm transferred in order to meet the European demand. This steering is currently calculated on the basis of NASAs cost. This is only one of iii possible advancees that are used to set to transfer impairments internally in spite of appearance Polysar Limited. The three options that whitethorn be considered are1. Set transfer prices at cost2. Set transfer prices at a negotiated mutually hold upon level 3. Set transfer prices at the foodstuff valueCurrently, as the 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 rendered for the units that are transferred, the product mix may be intractable on a sub-optimal basis.Our team recommends further investigation to determine the necessary information as to if the cost to produce the halobutyl and butyl rubbers within both NASA and EROW. This could backsheesh 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 higher than transportation costs of shipping to the other facility.Additionally, another problem being experienced by means of 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 pertaining to the costly sign investment of the second Sarnia plant get alonging $550 million and the associated depreciation. This leads to an unfair representation of favorableness 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 place price would benefit the NASA segment. This is be pose then NASA is recording revenue for the units transferred, whereas EROW will not, (provided that the prices in both markets are similar international arbitrage).With Polysars company across-the-board profitability in mind, as well as spirit of pallidness 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 make 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 stick relevant. For example, the corporate tax rate applied in North American versus Europe should be considered. Furthermore, precaution 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 few Custom Duty payments as the rubber crosses borders. Flexible Versus Static cypherary 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 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 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 evaluation of managements performance may be handd. This can be directly used when considering compensation for managers. inclose 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 establish a budgetary commissioning to review the estimates made to ensure the lower level management has not added in budgetary slack intentionally in an effort to ac hieve their compensation figures based on meeting these targets.However, even the top management currently possesses a huge conflict of interest influencing them in the committal 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 unnaturally manipulated to be higher than expected.As it is improbable to find members of the budgetary delegacy who will be completed impartial and not subject to a bonus on the premise of meeting profit targets, responsible news report should be implemented. This system holds each manager responsible for the estimate of the individualistic 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 unfeigned and budgeted results.In order to negate the previously mentioned conflict of interest, it is reco mmended to include the amount of variance in a managers 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 hazardThe nature of the Polysars business contains a certain spirit level of narrow 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 dogmatic 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 AnalysisAppendicesAppendix 1Polysar Rubber