Executive Summary

This study seeks to explicate the cardinal differences between the NASA ( North American South American ) and EROW ( Europe and remainder of universe ) gross revenues public presentation over the past nine months. There are several grounds doing the gross revenues public presentation figures presently stemming from NASA to be uncomparable with the EROW Numberss. including the current pattern of reassigning big measures of regular butyl rubber from the Sarnia to the Antwerp production installations.

As Polysar operates globally. it is besides of import to see certain international facets and specific hazards. These include. foreign currency exchange fluctuations. potentially making additions or losingss. every bit good as international revenue enhancements and duties. The determinations made sing allotment of net incomes between the two geographic centres will straight impact the revenue enhancements paid in either location. Add ON WITH SPECIFICS Introduction

A high-ranking overview of Polysar Limited provides an across-the-board image of the nature of this instance. necessary to later efficaciously concentrate in on specific fiscal inside informations and jobs. Polysar is Canada’s largest chemical company. with the North American production installation located in Sarnia Ontario. The company splits into 3 chief groups including petrochemicals. diversified merchandises. and gum elastic. of which the latter is the largest stand foring 46 % of gross revenues.

This gum elastic division is the nucleus of the study. as its success is critical to Polysar. The gum elastic division is split into two geographic centres. in Sarnia Ontario and Antwerp Belgium severally. ( See Appendix 1 for graphical representation ) . Both geographic centres produce both regular butyl and halobutyl gum elastics. In 1985. Sarnia opened a 2nd production installation that has non yet reached capacity. By comparing. Antwerp has merely one installation operating at full capacity and still unable to run into demand for regular butyl gum elastic. To get by with this. the Sarnia transportations big measures of its production to Antwerp at cost.

The inability of the Sarnia installation to gain a net income from these transferred units represents one of the chief causes of concern sing gross revenues public presentation figures. In order to right and expeditiously asses the current state of affairs. we will be reexamining a figure of standards. and from at that place introduce and analyze several options presented by these appraisals. Further Recommendations

Transportation Pricing
As you are cognizant. the NASA section is presently bear downing EROW for the butyl gum elastic being transferred in order to run into the European demand. This charge is presently calculated on the footing of NASA’s cost. This is merely one of three possible attacks that are used to put to reassign monetary values internally within Polysar Limited. The three options that may be considered are:

1. Set transportation monetary values at cost
2. Set transportation monetary values at a negotiated reciprocally agreed upon degree 3. Set transportation monetary values at the market value Currently. as the first option is implemented. this is doing the two major jobs. The first is in respects to the merchandise mix produced within the Sarnia production installations. As no net income is recorded for the units that are transferred. the merchandise mix may be decided on a sub-optimal footing.

Our squad recommends farther probe to find the necessary information as to if the costs to bring forth the halobutyl and butyl gum elastics within both NASA and EROW. This could take to determinations of specialisation in the Sarnia workss or Antwerp works for one type of gum elastic produced if cost nest eggs for that merchandise line is higher than transit costs of transporting to the other installation.

Additionally. another job being experienced through the current transportation pricing attack is that the NASA does non demo any net income on the Polysar internal transportation of gum elastic. Consequently. the EROW section may enter this net income without the same holding the extra fixed costs refering to the dearly-won initial investing of the 2nd Sarnia works amounting $ 550 million and the associated depreciation. This leads to an unjust representation of profitableness for the two cost centres.

In footings of which to utilize for Polysar Limited’s Rubber Segment. puting monetary values at cost hereby benefits the EROW centre. whereas utilizing market monetary value would profit the NASA section. This is because so NASA is entering gross for the units transferred. whereas EROW will non. ( provided that the monetary values in both markets are similar – international arbitrage ) .

With Polysar’s company broad profitableness in head. every bit good as spirit of equity in representation for both sections utilizing a de-centralized attack. our recommendation is the usage of negotiated transportation pricing. This occurs when the NASA and EROW sections collaborate to hold on a selling/purchasing monetary value for the internationally transferred butyl supply. Implementing this will do both sections to hold better information of the costs and benefits associated with the transportation.

To contract down on what this transportation monetary value should specifically be. a scope of acceptable transportation monetary values will supply an estimation. As this is an international transportation. there are even more considerations that become relevant. For illustration. the corporate revenue enhancement rate applied in North American versus Europe should be considered. Furthermore. direction should look specifically into responsibilities. duties. foreign exchange rates and hazards. every bit good as governmental relationships. By this item. bear downing Antwerp a lower transportation monetary value will ensue in fewer Custom Duty payments as the gum elastic crosses boundary lines. Flexible Versus Static Budgetary Systems

Presently Polysar employs a inactive budget system for their budgeted degree of gum elastic gross revenues. However. if more butyl or halobutyl gum elastic is produced and so sold these will do a discrepancy as composed to budgeted figures. For illustration. variable costs will travel up. nevertheless this may merely be in direct correlativity to the increased gum elastic produced.

It is of import to be able to analyse if discrepancies are based on volume or cost differences. By following the cost discrepancies more closely after implementing this flexible budget system. a better rating of management’s public presentation may be achieved. This can be straight used when sing compensation for directors. INSERT NUMBERS. Employee Compensation Plan

Polysar uses the participative budgetary system. which is straight linked to employee compensation. Although this bottom-up attack to budgeting allows for accurate estimations due to directors with specific gum elastic cost cognition being involved. it can do a struggle of involvement that may be dearly-won. It is indispensable. and extremely recommended that the NASA rubber division set up a budgetary commission to reexamine the estimations made to guarantee the lower degree direction has non added in budgetary slack deliberately in an attempt to accomplish their compensation figures based on run intoing these marks.

However. even the top direction presently possesses a immense struggle of involvement act uponing them in the way of leting for budgetary slack as their compensation is up to 50 % for both meeting divisional net incomes. every bit good as transcending corporate net income marks. These marks can clearly be met. if costs have been unnaturally manipulated to be higher than expected.

As it is unlikely to happen members of the budgetary commission who will be completed impartial and non capable to a fillip on the premiss of meeting net income marks. responsible accounting should be implemented. This system holds each director responsible for the estimation of the single cost and gross footing for which he or she was in charge of make up one’s minding. This means. he or she is basically responsible to explicate the differences between the existent and budgeted consequences.

In order to contradict the antecedently mentioned struggle of involvement. it is recommended to include the sum of discrepancy in a manager’s estimation in the calculate of compensation. hereby eliminated big fillips if the original estimation was non within a certain scope of the existent value ( extra-ordinary happenings excluded ) . Hedging of Hazard

The nature of the Polysar’s concern contains a certain grade of specialised hazard. First and first. runing internationally in assorted currency zones contributes to foreign exchange hazard. This can be hedged through capital markets. ensuing in take downing hazard for the corporation.

Besides. as there is a great grade of hazard for the variable costs of production in relation to the oil. it is imperative to fudge this hazard every bit good. It is really possible to fudge market trade good monetary value hazards through capital markets or beforehand purchase of these oil inputs. This can supply more stableness for Polysar Limited as a whole. peculiarly the cardinal gum elastic division.

Capacity Analysis

Appendixs
Appendix 1
Polysar Rubber