Brief Introduction to Polysar Limited

Brief Introduction to Polysar Limited

Polysar limited is the Canada’s largest chemical company and the world’s largest producer of synthetic rubber and latex and a major producer of basic petrochemicals and fuel products.

The organization is structured into three groups: petrochemicals, rubber and diversified products; the rubber group accounts for 46% of Polysar’s sales, whose main products are butyl and halobutyl, and whose principal customers are tire manufacturers. Rubber group is composed by two divisions NASA (North America & South America) and EROW (Europe & elsewhere); Butyl is produced by NASA at its Sarnia 2 plant, and by EROW at its Antwerp plant. EROW’s demand exceeds its manufacturing capacity, so EROW “buys” butyl from NASA.

Presentation

This presentation aims to explain to the board of directors the results of operations for NASA Rubber Division for the first nine months of 1986, it is important that this presentation integrates reports since the reading of data alone is not sufficient to evaluate firm’s performance. In fact, according to data in statements, in the first 9 months results are not as good as expected, and this would entail a negative evaluation of the NASA’s management team, but the team worked well. The main problem lies in the transfer of costs. Polysar uses a cost-based transfer price, in particular a full cost transfer price including both variable and fixed costs; the system is based on budgeted standard costs where no mark-up is included. Also, the transfers are not recorded as a revenue, so don’t create profit and if EROW cut back on orders, NASA’s profit is damaged through the volume variance. For these reasons, and since the businesses is run on return on net assets (that is very low for NASA), is essential a guide that helps the reader to interpret the data to avoid a wrong assessment about the business.

For the evaluation of performance let’s start from statistics and analyses show in Exhibit 1; this statement on one side highlights sales and production variations between actual and budgeted data, in terms of volumes; on the other side analyzes variations and transfers of fixed costs.

The “statement of net contribution” (Exhibit 2) would not be enough to evaluation of performance since that it explicate only information on sells to third party, and nothing about production and transfers to EROW; to discuss about the main problem that is about the accountability of transfer prices and butyl demand of EROW too, it is necessary an analysis of Exhibit 1.

In the first 9 months of 1986, Rubber NASA achieved a sales of 65.8 million, a result that was 4.8million higher than the budget and our actual net sales revenue are 4,57 million higher than planned. However, analyzing the net contribution, the division ended up a loss of 876 thousand, that was