Polysar Ltd.
BACKGROUND
Polysar Limited is Canada’s largest chemical company. It is structured into 3 groups, namely, basic petrochemicals, rubber, and diversified products. 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. EROW’s demand exceeds its manufacturing capacity, so EROW “buys” butyl from NASA.
FINANCIAL PERFORMANCE ANALYSIS
In 1986, Rubber NASA enjoyed sales worth $65.872 million which exceeded the estimated sales by $4.822 million. However, when it came to the net contribution, the division ended up with a loss of $876,000. This was $2.8 million less than the expected contribution. Comparatively, EROW did well in all aspects with sales worth $89 million and a net profit worth $22.6 million.
After further exam, management concluded that the large fixed cost absorbed the sale figure, due to which the two divisions with same products have such a difference.
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
Polysar Limited is Canada’s largest chemical company. It is structured into 3 groups, namely, basic petrochemicals, rubber, and diversified products. 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. EROW’s demand exceeds its manufacturing capacity, so EROW “buys” butyl from NASA.
FINANCIAL PERFORMANCE ANALYSIS
In 1986, Rubber NASA enjoyed sales worth $65.872 million which exceeded the estimated sales by $4.822 million. However, when it came to the net contribution, the division ended up with a loss of $876,000. This was $2.8 million less than the expected contribution. Comparatively, EROW did well in all aspects with sales worth $89 million and a net profit worth $22.6 million.
After further exam, management concluded that the large fixed cost absorbed the sale figure, due to which the two divisions with same products have such a difference.
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