Costs
Polysar Limited--recent assignment.
BACKGROUND
Rubber Group is the largest of the three operating units of Polysar Limited. The primary users of its products, such as butyl and halobutyl, are manufacturers of automobile tires; other users are from various industries. In 1986, Rubber group contributed 0.8 billion which is 46 percent of the company annual sale. The operation of the group is divided into four divisions, NASA (North America and South America) and EROW (Europe and rest of the world), Research department and Global Marketing department. NASA and EROW operate as profit centers each produce butyl and halobutyl dedicated to regional customers. Both of the centers have relatively flexible producing schedule to satisfy the increasing demand of halobutyl. After establishing the second plant in Sarnia, NASA is able to have each plant producing halobutyl and regular butyl. EROW, which has been running near capacity since 1980, solely focus on the production of halobutyl. Any idle capacity is utilized in manufacturing butyl.
FINANCIAL PERFORMANCE ANALYSIS
In 1986, Rubber NASA achieved a sale of approx. 66million which was 4.8million higher than the budget. However, when came down to bottom line (net contribution), the division ended up a loss of 876thousand. This was 2.8million lower than expected. Comparatively, EROW did well in all aspects with a sale of 89million and a net profit of 22.6million.
Why did the two divisions with same products have such a difference? After further exam, management concluded the large fixed cost absorbed sale figure.
First it is important to understand the standard costing system implemented in Rubber group.
Standard costing assigns quantity and price standards to each component of variable and fixed costs in calculating the total cost. In the case of NASA, the system uses standard purchasing price (input cost) and standard inputs usage in place for variable costs, and standard spending price (input cost) and standard
BACKGROUND
Rubber Group is the largest of the three operating units of Polysar Limited. The primary users of its products, such as butyl and halobutyl, are manufacturers of automobile tires; other users are from various industries. In 1986, Rubber group contributed 0.8 billion which is 46 percent of the company annual sale. The operation of the group is divided into four divisions, NASA (North America and South America) and EROW (Europe and rest of the world), Research department and Global Marketing department. NASA and EROW operate as profit centers each produce butyl and halobutyl dedicated to regional customers. Both of the centers have relatively flexible producing schedule to satisfy the increasing demand of halobutyl. After establishing the second plant in Sarnia, NASA is able to have each plant producing halobutyl and regular butyl. EROW, which has been running near capacity since 1980, solely focus on the production of halobutyl. Any idle capacity is utilized in manufacturing butyl.
FINANCIAL PERFORMANCE ANALYSIS
In 1986, Rubber NASA achieved a sale of approx. 66million which was 4.8million higher than the budget. However, when came down to bottom line (net contribution), the division ended up a loss of 876thousand. This was 2.8million lower than expected. Comparatively, EROW did well in all aspects with a sale of 89million and a net profit of 22.6million.
Why did the two divisions with same products have such a difference? After further exam, management concluded the large fixed cost absorbed sale figure.
First it is important to understand the standard costing system implemented in Rubber group.
Standard costing assigns quantity and price standards to each component of variable and fixed costs in calculating the total cost. In the case of NASA, the system uses standard purchasing price (input cost) and standard inputs usage in place for variable costs, and standard spending price (input cost) and standard